New home construction, known as housing starts, came in at a seasonally adjusted annual rate of 1.5 million, far better than expected, with both single- and multifamily starts recording significant monthly and annual gains. Builders have been busy as mortgage rates remain near historic lows (falling below 3% for a period of time) while cooped-up buyers cannot find enough houses to view; houses listed for an average of four days were snapped up in some markets.
Starts for multifamily units of five or more came in at 547,000; they took longer to ramp up in the wake of March lockdowns. Since May, we are seeing a catch-up. This is despite a jump in vacancies in what had been some of the hottest urban markets, including New York and San Francisco. Evictions have picked up but the bulk of the weakness from those losses has yet to be realized.
Single-family housing starts came in at 940,000 units, 8.2% higher than June. Most of the monthly gains were driven by strong activity in the South and West. Declines in the Northeast and Midwest were small, and off of smaller levels.
Building permits came in at a seasonally adjusted annual rate of 1.5 million, 19% above June levels. Tight supply in the single-family market and a catch-up in the multifamily market provided a boost to builders. Mortgage applications to purchase a home, strong in early July, have been softening in recent weeks. This is at the same time that costs to build a home have surged; the spike in lumber prices is expected to add an average of $14,000 to the price of a new home. Lumber mills actually shut down in April and May, not anticipating such strong demand. This will translate into an inability to build more affordable homes, which are desperately needed across the country. According to the NAHB/Wells Fargo Housing Opportunity Index, during the second quarter, just over 60% of new and existing home sales were considered affordable for a family earning median income; that is down from 79% just eight years ago.
Builder sentiment as measured by the National Association of Home Builders (NAHB) hit a 35-year high in August as builders across regions saw significant foot traffic. Sentiment was strongest in the West where devastating fires and fire tornadoes are threatening dry parts in California. The second strongest market was the South despite COVID-19 cases climbing and schools reopening only to move to online a few days later. Who would have predicted that college students wouldn’t be able to social distance? The hope is that sentiment remains strong despite all of the challenges.
Housing as a share of GDP came in at the highest level since 2007 during the second quarter. Much of that can be attributed to the composition: Housing was stable while other spending was down significantly. We expect housing to ride a wave into the third quarter, which could prove even stronger. That is assuming that the federal aid needed for millions of households comes through soon. It is worth repeating that the housing market could be the driver out of this recession, with the necessary support.
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