Housing Starts Edge Higher

Housing starts edged up to a 1.23 million-unit rate in October following slight upward revisions for September. Gains on a month-to-month basis were small and uneven. A rebound in multifamily starts overshadowed a drop in single-family starts. Escalating construction costs (land, labor and tariffs) have made it hard for builders to move downscale and build homes for the first-time buyer market where demand was picking up. Much of that demand is now shifting back into rentals. Housing starts remain more than 9% below levels hit one year ago.

Add rising mortgage rates and buying a home is once again becoming out of reach for many millennials. The new trend toward rentals over single-family homes is likely to persist in the near term. Surveys show the desire to buy is still there. The economics are hard given the blow the financial crisis dealt to millennial balance sheets. Millennials suffered the largest cut in entry-level wages at the onset of the crisis and still trail other generations. That is despite a higher level of educational attainment. Student debt is the primary reason. It’s hard to buy a home when your student debt is as much or more than a down payment.

The losses in single-family housing construction were broad-based. Only the Northeast saw an increase, but the level of construction activity there is not enough to move the needle. Rebuilding associated with this year’s hurricanes and devastating fires in California will help a bit but it will take time to show up. The mobile home industry is likely to get a boost before we see a large upswing in starts given the cost of rebuilding and lack of workers in areas hardest hit.

Permits for new construction held up a bit better than starts, which suggests some modest gains in November. The multifamily market, however, is better than the single-family market. This reverses a trend early in the year when the single-family market was picking up compared to rentals.

The new trend toward rentals over single-family homes is likely to persist in the near term. In November, builder confidence in the single-family home market dropped to the lowest level since 2014. Foot traffic was particularly weak, reflecting a drop in new buyer demand. The losses were across regions, including what had been some of the hottest markets in the West and South. Builders in Dallas have been offering price cuts on their highest-end (over $1 million) properties.

Bottom Line
Today’s rebound in housing starts fell short of market expectations, which suggests more hurdles for the housing market in the months to come. Rebuilding could alleviate that weakness a bit in early 2019 but the outlook for housing remains mixed at a critical time in the economic cycle. Housing is usually the first sector to peak before a recession.

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