Robust Outlook for Housing in 2020

New home construction, or housing starts, came in at a seasonally adjusted annual rate of 1.37 million in November, a double-digit gain from this time last year, led primarily by 16.7% growth in single-family home construction. Multifamily construction grew over 4% from last year, signaling that builders are finally stepping up to meet pent-up demand. Shortages of entry-level, single-family homes and affordable rentals remain acute. October data was revised up to 1.32 million.

Single-family construction grew to 938,000 in November, a 10-month high. Supply constraints in the existing housing market, due to baby boomers aging in place and the high costs of homes in cities, have constrained construction relative to the past. We also have a lot fewer builders to construct the homes we need. Some loosening of land-use constraints, particularly in California, is opening the door to more affordable construction. Washington has been slower to deal with the affordable housing crisis.

The greatest ongoing hurdles to housing construction are labor shortages and the cost of materials, which has risen on the heels of higher tariffs. Land-use restraints are also still much higher than in the past, despite efforts to free up more land for entry-level homes. In response, inventories of entry-level properties remain extremely low, while single-family construction remains less than half the peak during the housing bubble in early 2006. Single-family starts have been less than a million units since August 2007.

Regionally, annual growth in construction was broad-based except in the Northeast. In November, the South had strong multifamily construction growth, while the West had strong single-family growth. Again, this could reflect some easing of zoning laws.

Building permits, a leading indicator of housing market activity, came in at a seasonally adjusted annual rate of 1.48 million, beating expectations and hitting a 12-and-a-half-year high. Builder confidence soared to a 20-year high with sentiment over the traffic of prospective buyers hitting the highest level since December 1998. The home builder confidence figures are a bit misleading in that they reflect the fortunes of a much smaller group of builders than we had in the past; many went under in the wake of the housing bust.

Bottom Line
Mortgage rates have ticked up slightly but are still over one percentage point lower than this time last year. Although the Federal Reserve has signaled a pause in cutting rates, for the time being, mortgage rates are low enough to motivate robust activity in the housing market, which we expect will continue into 2020. Residential investment is in positive territory in the third quarter and is off to a strong start in the fourth quarter. Moreover, we should start to see some much-needed spillover of those gains into the manufacturing sector.

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