March Housing Starts Fall Short of Expectations
Assessing the strength of the housing market can be a bit like counting butterflies in a garden. The task is very dynamic, it requires constant revision and re-evaluation, and different perspectives can lead to very different conclusions.
Consider last week's information on housing starts for March 2016 as an example. March numbers represented a sharp drop of 8.8% from February to an annualized rate of approximately 1.09 million, well below the consensus estimate of 1.167 million. Building permits, the precursor to housing starts, also fell 7.7%. However, descriptions of the report by industry experts careened from "impressive" to "worrisome" to "highly disappointing."
Disappointing would appear to be an entirely reasonable analysis, as starts underperformed the lowest Bloomberg estimate (1.12 million), but given that February numbers were sharply higher — unusual for a winter month — such a drop should not have been a surprise. Realtor.com Chief Economist Jonathan Smoke suggested that the mild winter might have pulled typical spring starts earlier into the year.
What should we take away from the housing start figures? They must be evaluated in conjunction with other housing numbers, as well as within the context of time. Moving averages tend to be better indicators than monthly comparisons in volatile fields such as housing, and the 5-month moving averages for housing starts have been effectively flat since mid-2015.
Housing Improves, but Slowly
The "impressive" component in the report may be the continuing improvement over the previous year. Housing starts in March 2016 were over 14% above those in March 2015, as were the numbers for the first quarter of 2016 over 2015. The first quarter of 2015 represented a low point in housing starts followed by solid growth, and recent years have also tended toward poor first quarters and spring recoveries.
However, there is no guarantee that 2016 will follow suit with growth — and there are some signs that it may not, starting with permits. In fact, permits may be the most worrisome aspect of the housing report. They’ve been on a downward trend since December, suggesting that housing starts will have a hard time sustaining the springtime growth of past years.
In the longer view, starts are "historically low" according to the Wall Street Journal as compared to the 1990s and 2000s, prior to the housing bubble. Ralph McLaughlin, Chief Economist at Trulia, pointed out that the 12-month rolling total of starts is over 20% below the historical 50-year average, but at the same time, it is also a 13% increase in year-over-year rolling total. That is the most starts in any 12-month period since August 2007, before the market began to unravel.
Meanwhile, despite the perceived shift toward rental housing by millennials (and to some extent by previous generations), mortgage applications have been on an increase throughout the year, with double-digit, year-over-year increases. Also, existing home sales rose more than expected in March, consuming some of this excess demand, but new construction must rise to meet the rest of the demand.
The Housing Market Index (HMI), a measure of confidence among homebuilders, stayed flat at 59. This suggests cautious optimism with a slow growth rate, which matches the long-term housing trends once volatility is removed from the numbers.
These different factors explain why a report like the March housing starts can provide such a wide variety of opinions: it depends on expectations; perspective, timescale (the long-term view versus the short-term view), and whether the numbers make sense in the context of other monthly reports. In this case, the numbers do correlate: trends show slow, long-term growth and muted optimism.
The Ratio Shifts Toward Homeowners
Housing starts encompass both multi- and single-family homes. Single-family homes take up approximately two-thirds of the market, and represent an important driver for the broader economy. Greater single-family starts imply that more Americans have savings sufficient to provide down payments as well as steady incomes that can support mortgage payments.
The March numbers were split relatively evenly, with a 9.2% decrease in single-family homes and an 8.5% drop in multi-family buildings with five or more units, but the ratio of single-family homes has increased. Single-family starts have stayed over 700,000 in the past 9 months while multi-family housing is seeing greater volatility and trending lower overall.
Steady job growth and interest rates that are near historic lows are keeping the current growth trend positive, but lackluster. To see a more robust increase in housing starts, we will likely need to see a corresponding increase in wages, as well as available homes that match the needs of the market. Starter homes are in short supply because homeowners who were burned in the housing crisis are less willing (or able) to trade up, and that style of affordable housing is also less profitable for builders and developers to construct.
The housing market as a whole appears to be analogous to the overall US economy, with a little extra volatility added. The overall trends show growth, with underlying signs that could point to a future boom and other troubling signs that could point to a slowdown. Pick an attitude, and you can find at least a bit of data to support your thesis.
Attempting to assess monthly changes in the housing market is borderline futile because of volatility, and single point year-over-year information is not much better — you could easily be comparing a relative high point and relative low point. Rolling averages and historical averages provide better context. Using those barometers, housing is experiencing reasonable growth, but the rate is insufficient to bring us to full recovery from the housing crisis. Growth is being limited by a squeeze on available buyers thanks to flat wages and credit that remains relatively tight, as well as by possible mismatches between the available buyers and their housing needs and preferences.
As you analyze the housing market with an eye toward investments, stick with longer-term metrics such as rolling averages instead of monthly values. On the other hand, if your focus is on buying a home for your family, you are interested in the here and now, ask yourself: is the home I want available, can I afford it, and are the interest rates reasonable? So far, interest rates are still holding at remarkably low values. You will have to answer the other two questions for yourself.