Housing Starts Rebound Sharply

Housing starts rebounded to a 1.74 million unit-rate in March, up nearly 20% from an upwardly revised February. The pace was the highest since 2006. We saw a push by builders to reduce backlogs, which further mounted in the wake of disruptions triggered by unusually harsh winter weather and widespread power outages in the oil patch.

Both single- and multifamily starts surged in March. Demand remains strong as shortages intensify. Starts are running 37% above year-ago levels. The annual comparisons over the next few months will look even more dramatic because a year ago, starts plummeted in response to lockdowns.

Housing construction jumped in most regions except the West, which didn’t suffer the kind of weather-related losses we saw in the South in February. The Midwest also saw triple-digit increases in construction. Overall, single-family construction rose 15% on the month while multifamily with five units or more spiked 30%.

Building permits picked up, suggesting that recent gains will be sustained. The bump in starts was fueled entirely by single-family permits; multifamily permits fell during the month. The bulk of permit activity occurred in the South, which was hardest hit by weather losses in February and has seen a surge in migration from firms and employees looking for more affordable space to accommodate a hybrid of work-from-home. The backlog of homes authorized but not yet started swelled to 124,000 in March, the highest level since 2007.

Affordability remains a concern with mortgage rates above recent record lows. Mortgage rates climbed to over 3% in March but have eased slightly in April. Mortgage applications to purchase a home declined for the third straight week while applications for refinancing reached the lowest level in over a year after six weeks of lower numbers. Mortgage applications operate on about a two-month lag, so the decline in applications will show up in May and June home sales.

Supply constraints should ease as demand softens. Lumber prices hit a new record high in April, which should bring new capacity on line and eventually lower prices. Affordability is becoming a concern as investors snap up more new construction to rent instead of sell. This is hindering the ability of many first-time buyers to start building wealth via home ownership.

Builder confidence remained strong in April as traffic from prospective buyers returned to November levels. Builders say they are confident about current sales but six months out is starting to look less robust. Margin compression is a worry. The cost of producing a new single-family home has gone up an average of $24,000 from a year ago from lumber prices alone; the return of investors has helped builders to pass on these costs to consumers.

New research from Freddie Mac indicates that 3.8 million single-family homes need to be built to meet demand from new household formation, second-home buyers and replacement for aging stock. At the current pace of construction, it will take three years to fulfill that need. Additionally, the pace of building entry-level homes has been falling short for decades. Last year, the number of entry-level homes (1400 square feet or less) built fell to 65,000. That compares to 400,000 units built annually during the 1970s and over 300,000 in the 1980s.

Bottom Line
The housing market remains hot as we enter the traditional home buying season. Investors who are scooping up entry-level homes, especially in hot markets, are exacerbating the supply shortage for entry-level buyers.

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