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Housing Starts Stronger than Headline Losses

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Housing starts, the number of privately-owned housing units on which construction began in September, came in at a seasonally adjusted annual rate of 1.256 million, much lower than expected. August figures were revised up to 1.386 million, a post-recession high. Multifamily housing starts are trending higher than pre-recession levels, with September’s figure of 338,000 bringing the third quarter average to 381,000. Single-family housing starts show limited growth, with September’s figure of 918,000 bringing the third quarter average to 901,000, about half of the pre-recession peak. Growth in residential investment looks encouraging in the third quarter; however, supply constraints continue to dampen the housing market during this longest economic expansion in history.

Regionally, losses were broad-based, save for single-family starts in the South, which rose 7.1%. Above-average and record precipitation pummelled the West and Midwest, while record-high temperatures hit the South and parts of the Northeast. Just as in August, no hurricane made landfall in September, sparing the South and Northeast from catastrophic damage. However, the specter of climate change continues to haunt, with extreme weather events such as wildfires and record flooding crippling communities, destroying property without the insurance and replacement that we once saw in the wake of such events.

Building permits fell from August’s high to 1.387 million in September but still showed modest gains. The bulk of permits were granted in the single-family home market, with 882,000, which have been climbing steadily since the spring. Pre-recession figures for single-family permits hovered around 1.8 million, more than double current levels. Multi-family permits, at 505,000 for the month, have almost caught up to their pre-recession peak of 575,000. Builders remain optimistic, as lower mortgage rates tend to motivate would-be buyers to purchase new homes. The National Association of Home Builders’ sentiment index hit a 20-month high in October, with prospective buyer traffic (the lowest component of the index) trending in positive territory for the third month in a row.

Construction job openings in August climbed to 379,000, up from 315,000 in August of 2018. The lack of skilled construction workers is driven by factors gathering force for many years. Factors such as a decline in skilled labor from younger generations due to shifting from trade-school to college enrollment, a decline in skilled labor from older generations due to retirements and a decline in immigrant construction workers due to restrictive immigration policies.

This is at the same time that productivity growth for construction workers particularly on single-family home projects has stagnated. According to the Bureau of Labor Statistics, worker productivity for all workers in the U.S. has risen about 40% since the 1990s while productivity for construction workers has remained about flat.

Construction costs have been rising since the Great Recession, with one of the largest shifts occurring in the regulatory environment. Rising costs due to scarce labor, land use, environmental regulations and building materials are putting significant strain on builders’ profit margins. According to the National Association of Home Builders, from 2011-2016 regulatory costs for building a new home rose by 30%, which they estimate to be around $85,000 on average. In places like California, the costs are closer to 40%. These costs are incurred at the development and construction stages, with almost one quarter of the average final home price reflecting these costs alone. Builders are incentivized to build high-end homes in order to guarantee healthy margins, further undermining the supply of starter homes.

Bottom Line
The housing market is the silver lining in what is adding up to be an extremely weak third quarter and will likely add to momentum in the fourth quarter as well. This is the first time the housing market will be a contributor to quarterly growth in nearly two years but it still isn’t enough to deal with the needs of an undersupplied market. Real GDP growth currently tracking well below 1.5% during the period.

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