New Home Construction Beats Expectations

January’s housing starts came in at a seasonally adjusted annual rate of 1.57 million, exceeding expectations and rising over 20% from January 2019. Single-family starts hit the one million-unit threshold for the second month in a row; single-family starts hadn’t hit one million since the housing boom. Additionally, multifamily construction hovered above half a million units for the second month in a row, over 70% above January of 2019 figures. Both November and December figures were revised up. Unusually mild winter weather helped to boost housing along with low interest rates. This is the first time we have seen housing construction really respond in a meaningful way to low rates since before the housing bust, but we are still playing catch-up. The supply of homes for sale remains well below demand; home builders estimate we are still one million units behind the pace of household formation.

Permits to build new homes rose by 9% to an annual rate of 1.55 million in January. Compared to this time last year, permits are up almost 18%; permits for both single-family and multifamily buildings of 5 units or more were behind that push. Permits are still nowhere near the highs we saw during the housing boom, which were over two million in 2004 and 2005.

Builder confidence remained in record territory for the third month in a row in February, with most of the boost coming from the South and the West. That said, we have fewer builders to meet the burgeoning demand for entry-level homes than we did more than a decade ago. The result is less speculative, single-family home construction and more upward pressure on prices. Shelter and medical costs have been the largest contributors to overall consumer inflation in recent months. Rents are also going up now more rapidly in suburban and second-tier markets than they are in what were the hottest coastal cities.

Overbuilding in the luxury market and a slowdown in foreign purchases have slowed the upward pressure on prices in coastal markets. Chinese investors, in particular, have pulled back and are expected to remain scarce in the wake of the novel coronavirus outbreak. Travel and tourism both in and from China are close to a standstill.

After a slight uptick in mortgage rates last week, mortgage applications contracted for the week of February 14. However, mortgage applications had risen almost every week so far in 2020. Refinancing continues to be the leading category, boosting homeowners’ spending capacity but further exacerbating the housing supply crunch due to those homeowners staying in place. So far, much more of the refinancing activity has shown up as a way to pay down outstanding debt instead of spending on big-ticket items. This marks a sharp reversal from the housing bubble when subprime borrowers tapped their home equity to fund current consumption.

Bottom Line
The housing market remains a silver lining in what is becoming a cloudy outlook for the broader U.S. economy. We still have some distance to go to catch up on what was lost to the housing bust.

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