Multifamily Continues to Drive Housing Starts

August housing starts were 1.36 million units at an annualized rate, the highest count since June 2007. Compared to last month's revised estimate of 1.22 million, housing starts are finally showing much-needed gains in response to low mortgage rates.

Single-family starts rose 4.4% from last month, while gains in multifamily construction stole the show with a 31% increase. While this is good for the month, we need a stronger yearly growth rate than 6.6% to boost supply, especially at the entry-level price points, to match growing demand.

Lack of supply remains an obstacle, despite the gains we are seeing in the multifamily market. Builders cannot build enough housing to meet growing demand from first-time home buyers. Constraints include land availability, zoning regulations and high costs for labor and materials. According to the Bureau of Labor Statistics, there were 373,000 construction job openings in July alone, up from June and July 2018. Research by Freddie Mac estimates that 1.62 million units were needed in 2018 in order to support the growing economy. Out of that total, about 300,000 units are needed to replace old, dilapidated housing. We are currently 256,000 units below that estimate and are exiting what was meant to be the busiest season for construction. The supply constraints push up prices, which bar entry-level buyers from participating in the housing market.

Regionally, single-family starts posted gains everywhere but in the land-constrained Northeast. Multifamily starts posted gains everywhere but in the zoning-heavy West. The South, the largest housing market in the country, posted healthy annual and monthly gains. No catastrophic hurricanes hit the mainland this August, which helped to boost the seasonally adjusted pace of construction in the South and the Northeast.

Building permits exceeded expectations for the month, at an annualized rate of 1.42 million units. While permits for single-family housing increased 4.5% both monthly and annually, the biggest driver continues to be multifamily permits. The continued rise of multifamily construction will do little to alleviate the single-family market supply deficiencies.

The home builders’ sentiment index inched up one point to 68 from last month. Builders are optimistic about current sales; the lowest component of the index, foot traffic, remained steady in positive territory for the second time this year. Sentiment is strongest in the West and weakest in the Midwest. The only major weak spots in the survey are counties with a heavy manufacturing presence. Trade tensions were cited for the weakness. The effects span everything from demand to the supply of housing as tariffs are raising the costs of some building materials.

Bottom Line
New residential construction was strong in August but that is not enough. Millennials, who have been stuck in the rental market or living at home are staying there longer than previous generations. The housing market is adding to growth, but not enough to move the needle on homeownership for millennials, a generation missing out on wealth creation.

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