November Housing Starts Rise

Housing starts rose to a 1.26 million unit rate in November after a downward revision for October. A pick-up in multifamily construction - largely apartment rentals - more than offset another drop in single-family home construction. This should not come as a surprise given the deterioration in home builder confidence in recent months. Foot traffic is particularly slow, with builders seeing the greatest weakness in the most expensive homes and regions.

The Northeast and West experienced the largest drop in single-family home construction. Escalating land, labor and materials costs have collided with rising rates and rapid price increases seen earlier in the cycle, undermining demand. In many areas, luxury housing - priced at over $1 million - is suffering price cuts. Older homeowners who currently have the most equity in their homes are opting to remodel existing properties instead of trading up. Foreign buyers, most notably from China, have also pulled back, taking a toll on demand in high-priced coastal cities such as Manhattan and San Francisco.

The market for entry-level housing has also softened considerably, as builders complain they can’t cover their costs if they move too far downstream price wise. The foot traffic just isn’t coming in the door to justify the compression on margins, while memories of the housing bust linger. No one wants to get caught with hard-to-sell inventory in far out suburbs and rural areas when the housing market collapses.

The South was the bright spot, sporting single-family home construction gains. Even there, construction is well off the highs from earlier this year and a year ago when rebuilding associated with Hurricanes Harvey and Irma helped buoy construction in the South. That said, rebuilding is not what it once was as many of the home that were destroyed both this year and last were not covered by insurance. It is extremely hard to recover from flooding. We haven’t seen a major disaster really trigger much in terms of a building boom since Hurricane Andrew hit in the summer of 1992. A surge in insurance bankruptcies following Andrew and cuts to the FEMA budget in recent years have limited the extent to which homeowners can afford to rebuild. Parts of Houston remain devastated from Hurricane Harvey, which was over a year ago.

Separately, fires across California likely exacerbated the weakness in single-family construction in the West in November. The worst of the damage occurred in the weeks leading up to and including Thanksgiving, bringing much activity to a standstill. Again, it is unclear how much will be covered by insurance given the magnitude of damages. Nearly 19,000 structures, most of them shelters, are estimated to have been destroyed by the Camp Fire in Paradise, California alone.

Permits picked up, which suggests we could see another gain in overall housing starts in December. The bulk of those gains were concentrated in the South. The Northeast and the Midwest saw a drop in permits. There was only a small gain in permits in the West, and all of that was in the multifamily market.

Single-family home construction has yet to fully recover from the housing bust, leaving many markets short on inventory. The supply of entry-level homes is particularly acute and likely to keep more families living in apartments longer than seen during recent cycles when the trend went in the opposite direction. The lack of entry-level properties has further penalized millennials, the generation hit hardest by the crisis. Homeownership is the means by which most families start to build wealth.

Bottom Line
November housing construction gains were a bit of a head fake, with a rise in multifamily offsetting another decline in single-family construction and overall starts still down from a year ago. Weakness in housing raises a red flag for the overall economy as it tends to lead the economy into a recession. This is one of many reasons we are worried about a recession occurring in late 2019/early 2020.

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