Housing Market Weathers Wet Spring

Housing starts came in at 1.27 million units, almost one percentage point below the revised April estimate, which was adjusted up to 1.28 million units. A lower count in single-family homes was to blame; multifamily units expanded by almost 11% on a monthly basis and nearly 14% compared to this time last year. The good news is that the last few revisions to housing data have been upward, so we could see improvement again when May data are revised.

Only the South recorded an uptick in monthly and yearly starts; declines were otherwise broad-based. Heavy rain and flooding were likely factors as the country experienced one of the wettest Mays in history. Supply factors, such as land restrictions and over 400,000 unfilled construction jobs, are driving up prices, which in turn, trip up would-be first-time buyers.

Housing permits, a slightly less volatile category than housing starts, saw small gains month-over-month, driven by single-family permits, which account for almost two-thirds of all housing permits. Declines in multifamily units were most significant in the Northeast and the Midwest, while the West posted welcome gains.

Homebuilder sentiment, which captures the single-family home market, slipped two points to 64, lower than expectations. The National Association of Home Builders (NAHB) reported that all three of its indices - current sales, sales in the next six months and traffic from prospective buyers - dipped in June. Sentiment regarding potential buyers remains below 50 (the cutoff for positive sentiment) for the eighth straight month. With the most recent 30-year mortgage rate coming in at 3.82% (Freddie Mac), nearly a two-year low, the reality is that the foot traffic isn’t there yet.

The good news is that the increase in mortgage applications in the most recent week topped expectations, coming in at almost 27%. While mortgage refinancing accounted for nearly 50% of applications (this is the most rate-sensitive group), we finally saw applications for home purchases climb significantly as well. Fence sitters have been incentivized by falling rates. We expect housing data early in the third quarter to rise since mortgage applications contribute to housing market data with about a two-month lag.

We continue to monitor the entry-level market, where the tight supply is keeping out low-income and first-time home buyers. A positive signal in the mortgage application data, a drop in average loan size, suggests some first-time buyers are finally jumping into the market. The move by builders downstream into less expensive markets and smaller homes is the primary driver; the largest cities remain out of reach for many millennials. Next week’s new home sales data will provide more detail on median prices. The shift to building lower-priced homes will help meet demand in the entry-level part of the housing market, which could boost sales this summer.

Bottom Line
First-time home buyers, including millennials, are starting to dip their toes into the housing market. With record-low unemployment, rising wages and falling mortgage rates, there is room for entry-level participants to buy homes and begin to build wealth. Unfortunately, headwinds from supply constraints and uncertainty about new tariffs are clouding prospects. June marks the longest economic expansion in U.S. history, yet many people are left on the sidelines. The largest generation currently in the labor market is missing out on the significant wealth-building opportunities that the housing market can bring.

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