Housing Starts Stalled in January

January housing starts, new home construction, came in at a seasonally adjusted annual rate of 1.58 million, 6% below December’s upwardly revised data and 2% below year-ago levels. All regions except the Northeast posted fewer starts. January could prove to be a blip. Taking a wider view, starts hit their second-highest level (only December 2020 was higher) since before the pandemic struck; that points to strong demand in the housing market, which is a boon for builders.

Single-family starts, at 1.2 million, remained above the one-million mark for the sixth month in a row. With the exception of a few jumps in late 2019, single-family starts have been below one million since the housing market peaked in 2006. All regions listed annual gains in single-family starts; the Northeast was the only region with growth compared to December last year.

Multifamily starts hit 402,000 units for January, marking the highest pace since July. The shift by renters from expensive, urban locations to suburbs or smaller cities has been exacerbated by the pandemic. Additionally, as more potential homeowners find themselves outbid or priced out of the market, demand remains for rental apartments, especially in second-tier cities.

Housing demand overall continues to be strong, as bidding wars in some of the hottest markets illustrate. Potential buyers claim that the number one reason they couldn’t buy a home was that they were outbid, according to a recent survey from the National Association of Home Builders (NAHB). In 2020, two-thirds of buyers purchased a home they never saw in person (according to Redfin data).

According to the New York Federal Reserve Bank’s Household Debt and Credit report, new mortgages taken out in the fourth quarter of 2020 totaled $1.2 trillion, a record high. Credit-worthy borrowers, or those with scores of 760 or higher, took on over two-thirds of those mortgages, more than double the proportion in 2003, which was during the last housing boom. Low rates and strong household finances for those who are able to work from home boosted participation by higher wage buyers. We expect mortgage rates to remain low in 2021, even as the 10-year Treasury bond yield rises on positive economic news on a recovering economy.

Mortgage forbearance from the CARES Act slated to expire in March has been extended for an additional six months with foreclosures banned until June 30. As of February 16, 2.6 million mortgages were in forbearance; the number of new mortgages entering forbearance was flat; and, more mortgages exited forbearance. Forbearances stand at the lowest level since April of 2020 when the CARES Act was first enacted. With additional support from stimulus checks in late December, many consumers have been able to cover basic needs like food and shelter.

That data doesn’t tell the full story though. According to the Urban Institute, more than one million delinquent mortgages never entered forbearance; many minority homeowners were unaware of the options available to them and are now at higher risk of foreclosure when moratoriums lapse in June; that would stain their credit records and make it harder to obtain housing in the future.

We do not expect foreclosures to surge to Great Recession levels, however. Delinquent borrowers could still be eligible for loss mitigation options. Others may be able to sell their homes for a profit as equity has risen sharply since the pandemic began.

Permits for new home construction hit a 1.9 million seasonally adjusted annual rate in January, the highest rate since May of 2006. Both multi- and single-family permits rose last month; multifamily permits jumped 28%.

Homebuilder sentiment in February, as measured by NAHB, came in at 84 points on the index (anything above 50 is considered positive). Sentiment remains above pre-pandemic levels as strong demand continues to bolster builders. Traffic from prospective buyers remains strong as record price growth and bidding wars in the existing home market are pushing potential buyers to build instead.

Lumber prices hit a new record high this month; the polar vortex is disrupting shipments from Canada. A boom in remodeling at the end of 2020 did not help lumber supplies, causing prices to rise before the year ended. Price spikes hurt the lower end of the housing market the most as builders look to make more profit from an already low-margin investment. Builders warn that some starts may be in danger of being canceled, especially for apartments, which are also in great demand.

Bottom Line
The housing market remains strong. Many homeowners are in good financial positions to weather the COVID storm. However, tight housing supply, higher lumber costs and disruptions caused by this month’s polar vortex could curb future buyers’ ability to enter the market. For those who have suffered job losses and other COVID-related stressors, especially minority communities who are more likely to rent, the additional support package being negotiated in Congress is badly needed. The recovery has mainly benefitted those at the top, while many households still struggle with joblessness and food insecurity.

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