Housing Starts Post Modest Gains

Housing starts rose to a 1.28 million-unit annualized rate in August after treading water at a 1.17 million-unit rate in July. Gains were in both the single- and multifamily markets, but the level of starts remains well below highs hit earlier in the year in both categories. The multifamily market is softening faster than the single-family market. Foreign investment, most notably by the Chinese, has plummeted over the last year.

Starts were stronger in all regions except the Northeast where changes to federal income tax laws are exacerbating the affordability problem. Homeowners in high-tax states are now capped on the state and local taxes they can deduct from their federal taxes as a result of those changes.

I have spoken to a lot of builder clients recently who say that what was once purely a supply problem is evolving into affordability and demand problems. Places like Dallas are still booming despite short supply but demand is mixed in other parts of the country. California is growing more uneven with San Francisco remaining much stronger than Los Angeles,” which is starting to show signs of weakness. The only region to post large double-digit gains from a year ago was the West. Recent tariffs, which are pushing up materials costs, are further complicating builders’ efforts to move downstream where demand is strongest.

Separately, the floods in the Carolinas are expected to further boost construction costs as supplies and workers are diverted to make repairs. The biggest hurdle for many homeowners is a lack of flood insurance. It is much more restrictive than insurance for other kinds of damages, which will delay rebuilding. Parts of Houston remain devastated a year after Hurricane Harvey hit.

Bottom Line
Home building has lagged overall demand for some time. That may be shifting; building more homes for first-time buyers could open the market for some millennials. It could also be a sign of hurdles that the broader economy has yet to face. Housing is one of the first sectors to crest in an expansion.

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