Housing Starts, Permits and Builder Confidence through January 2015

This was the fifth consecutive month that the 3MMA of starts exceeded a million units. The year/year growth rate of the 3MMA of total starts in January was 4.3 percent. The growth rate by this measure is down sharply from 16.7 percent in September. Note this is not seasonal because there is a seasonal adjustment and, in addition, we are considering year over year relationships. Total starts are still on track to reach 1.6 million by the end of 2018.

Multifamily starts are now beyond the pre-recession high of January 2006 but the growth of starts in this sector has slowed dramatically from a 3MMA year over year of 35.9 percent in August to 2.2 percent in January, (Figure 2).

If we ignore the growth spurt of mid-2014, this sector has been slowing since early 2012 and may be approaching saturation. Single family are still 62.8 percent below the pre-recession level but growth in this sector has been higher than multi-family for the last three months, (Figure 3).

Permit data is useful is useful as a forward look at future starts. If permits exceed starts then we anticipate an acceleration and vice versa. Table 1 shows total permits and starts nationally and regionally.

At the national level the differential between permits and starts for single and multi-family units suggests that the future mix of starts will be different from the recent starts data. Permits exceeded starts for multifamily and lagged behind starts for single family. In total permits were 2,000 more than starts. Multifamily permits were 34,000 more than starts and single family were 32,000 less than starts. The permit data suggests that the recent decline in multifamily starts could be short lived and that the improvement in single family doesn’t have legs. The ratio of the two sectors is shown in Figure 4 and demonstrates that single family compared to multifamily has improved slightly but single family homes continue to be less desirable than at any time in the last 30 years.

Based on permit data, the ratio will not change any time soon. Student loan debt exceeded $1.3 trillion in Q3 of 2014 for the first time, this must be impacting the young person’s view of other debt obligations and so presumably is the view that housing is not necessarily the great investment that it was once thought to be. In addition, uncertainty in the job market makes mobility desirable and promotes the idea of rent in preference to purchase. To attempt to counter these trends Fannie Mae and Freddie Mac have introduced a new program for first time buyers that requires only a 3 percent down payment down from what has become the traditional 20 percent level since the subprime debacle. First time buyers normally account for 40 percent of new home sales. In this case first time is defined as not having held a mortgage for three years.

The situation in the four regions reported by the Census Bureau were not synchronous in the last three month when the South softened and the West strengthened. The Midwest and the Northeast have been fairly stable since last June. Figure 5 shows the regional situation for total residential starts since January 2000.

The National Association of Home Builders, (NAHB) confidence report was released on Tuesday, (Figure 6). Any value above 50 indicates an overall positive business confidence. The index declined by two point to 55 in February and the 3MMA decreased one point to 56.7 which is only slightly off the November value of 57 which was the highest since our data stream began in January 2009. On a regional basis, the West is the most optimistic and the North East the least. This report aligns with the census Bureau data in showing that the West and the South are moving in opposite directions. The composite index, signals that homebuilders are generally positive in their views of the market. All regions except the North East have a positive outlook.

The official release from the NAHB read as follows:

Builder Confidence Slightly Lower in February on Harsh Weather Conditions

February 17, 2015 – Builder confidence in the market for newly built, single-family homes in February fell two points to a level of 55 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today.

“Overall, builder sentiment remains fairly solid, with this slight downturn largely attributable to the unusually high snow levels across much of the nation,” said NAHB Chairman Tom Woods, a home builder from Blue Springs, Mo.

“For the past eight months, confidence levels have held in the mid- to upper 50s range, which is consistent with a modest, ongoing recovery,” said NAHB Chief Economist David Crowe. “Solid job growth, affordable home prices and historically low mortgage rates should help unleash growing pent-up demand and keep the housing market moving forward in the year ahead.”

Derived from a monthly survey that NAHB has been conducting for 30 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

Two of the three HMI components posted losses in February. The component gauging current sales conditions edged one point lower to 61 while the component measuring buyer traffic fell five points to 39. The gauge charting sales expectations in the next six months held steady at 60.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell a single point to 46, and the Midwest and South each posted a two-point drop to 54 and 57, respectively. The West rose two points to 68.

Editor’s Note: The NAHB/Wells Fargo Housing Market Index is strictly the product of NAHB Economics, and is not seen or influenced by any outside party prior to being released to the public. HMI tables can be found at nahb.org/hmi. More information on housing statistics is also available at housingeconomics.com.