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Housing Starts Rebounded in June

RFP
Housing starts, which is when new construction breaks ground, grew 6.3% in June after May figures were revised lower. Total starts hit 1.64 million units, surpassing expectations. Both single- and multifamily construction expanded during June as builders continued to work through a backlog of projects. The number of units currently under construction reached 1.36 million, the highest since July 2006.

Single-family home construction grew 6.3% to 1.2 million units. Strong activity in the South, the largest housing market, and the Northeast, the smallest market, drove gains. The supply of homes available for sale remains tight as many buyers jump on historically low rates. Those who already own homes have been able to tap into growing equity and purchase vacation homes. First-time buyers are being priced out as bidding wars continue in many of the country’s hottest markets.

Multifamily construction of buildings with five units or more grew 6.8% to 474,000 units, the highest level in almost a year. The Midwest and West drove those gains. The first half of 2021 has seen a surge in renter demand; the move to second-tier cities accelerated by the crisis, especially by the tech sector, is pushing up demand for rentals. Beneficiaries include Nashville, Phoenix, Austin and Dallas. Those regions are experiencing some of the highest home price growth, driving many to continue to rent, even though incomes in the tech sector are some of the highest.

Applications for holding permits in June fell 5.1% to 1.6 million units, missing expectations. Losses were broad-based as all regions reported a drop. That points to a cooling in residential investment for the third quarter.

Builder sentiment slipped a bit in June but prospective sales over the next six months help to bolster sentiment. Current conditions have slipped due to the sustained rise in input prices, especially for lumber and steel products. While framing lumber futures have declined significantly from a peak in May, the price drop will not be passed on to home buyers just yet. Additionally, a wood product called oriented strand board has spiked over 500% since pre-pandemic, adding almost $30,000 to the price of a new single-family home and almost $10,000 to a multifamily home. Supply chain issues are still a constraint; it is much harder to reopen an economy than it is to shut it down.

Mortgage rates declined slightly in early July as concerns over the Delta variant and slower growth abroad have kept interest rates suppressed. Rate fluctuations typically affect refinancing activity more than new applications but both rose in the same time period. Lenders have begun to cast a wider net to bring in more business, which means loosening some of their requirements and allowing more borrowers to take advantage of low rates.

Low mortgage rates are not enough to offset the significant home price increases since the start of the pandemic. Buyer sentiment, as tracked by Fannie Mae, hit a record low in June, with only a third of buyers saying it is a good time to buy a home. The intense competition to find a home has discouraged many first-time buyers, who are remaining renters.

More existing housing supply has been coming back to the market as over three-quarters of sellers believe now is a good time to sell. Listings jumped 5.5% compared to a year ago, according to Realtor.com, but it is still not enough to meet demand.

Bottom Line
The typical home-buying season is being pushed further into the second half of the year as high prices and low inventory send would-be buyers to the sidelines. As price pressures for materials ease in the coming months, builders will remain busy keeping up with a backlog of projects they paused to wait out the price spikes. Mortgage rates will remain low. The Federal Reserve has signalled it will be patient in raising rates in order to ensure more workers will be brought back into the labor force.

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