The Home Buyer's Korner

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October 26th, 2015

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Housing Starts and its Predictive Value

New Home Sales

The Census Bureau defines a housing start as occurring “when excavation begins for the footings or foundation of a building” – New Residential Construction Definitions.

The Census Bureau/U.S. Department of Housing and Urban Development released its estimate of housing starts in September earlier this week. The report estimated that 1.103 million housing units on an “annualized” basis were started in September. While the reported number exceeded Wall Street estimates, the housing starts metric is perhaps one of the most misused housing market statistics, as it applies to measuring the strength of the market for new home sales.

Housing starts have a low correlation with future new home sales. A housing “start” does not necessarily translate into a sale and in today’s world current housing starts are 27 percent below the 50-year average.

Furthermore, it has very little predictive value for forecasting future home sales. For purposes of this post, I am focusing on housing starts for single-family homes because the publicly traded homebuilders primarily build one-family housing units and my overall assumption is that homebuilder stocks are highly overvalued.

Multi-family housing units are primarily rental building complexes built by large construction companies. With this in mind, although the latest aggregate housing starts report showed a gain from August to September, single-family home starts actually declined 5 percent. Seasonality is not necessarily a factor here, as single-family starts from August 2014 to September 2014 increased 4 percent. When including the multifamily housing starts, last month rose 6.5 percent to a seasonally adjusted annual rate of 1.21 million homes. That 17 percent surge in multifamily housing — which includes apartments — accounts for almost all of that.

Construction companies built more apartment complexes in September, resulting in a temporary rise in housing starts for a real estate market that otherwise appeared to have crested during the summer.

New construction and sales of existing homes surged in the first half of the year as more Americans found work and the unemployment rate dipped to a solid 5.1 percent. But tight inventories, rising prices and the absence of meaningful wage growth have capped growth as affordability has become an issue — a problem that new construction can help resolve.

Builders are stepping up to meet that demand, but doing so cautiously. For the beleaguered home buyer who can’t find what they are looking for because of a dearth of listings, there is a bit of help on the way.

Construction rose last month in the Northeast, South and West, while falling in the Midwest.

Housing starts soar 12 percent in the first nine months of 2015. But the pace of building retreated from its June apex, in part because of the expiration of tax incentives for developers in New York.

Approved permits fell 5 percent in September to an annual rate of 1.1 million, a sign that construction will slow in the coming months.

Sales of existing homes similarly accelerated through the start of the summer, only to decline in August. The tight inventories — just 5.2 months’ supply of homes were listed for sale — have propped up prices. The median cost to buy a home increased 4.7 percent over the year, to $228,700, according to the National Association of Realtors.

A greater share of the country also chooses to rent. The percentage of Americans owning homes has dipped to 63.4 percent, the lowest level in 48 years. The influx of Millennials and downsizing baby boomers into the rental market has caused monthly leases to jump 3.8 percent over the last year, according to the real estate firm Zillow.

But many Americans lack the income to spend more on housing. Average hourly earnings have increased just 2.2 percent to $25.09, meaning that home values and rental costs are rising at roughly double the rate of incomes!

There are signs that more Americans are renovating their homes instead of buying new properties. A new index compiled by BuildZoom , which identifies contractors for projects  found that renovations are running 2.8 percent above their 2005 level. Still, remodeling activity was flat during the last year as new home construction has advanced. The gains have left construction firms more optimistic.

Despite the gains of the last year, new home construction remains 57 percent below its 2005 level during the housing bubble.

The National Association of Home Builders/Wells Fargo builder sentiment index released last Monday rose this month to 64. The last time the reading was higher was October 2005 at 68. Readings above 50 indicate more builders view sales conditions as good rather than poor.


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