April Housing Starts and Permits

KEY DATA:  Starts: -30.2%; Year-to-Date: +7.6%; 1-Family: -29.4%; Multi-Family: -40.1%/ Permits: -20.8%; Year-to-Date: +3.7%; 1-Family: -24.3%; Multi-Family: -14.2%

IN A NUTSHELL:  “The housing market has taken a big hit, but don’t count it out just yet.”

WHAT IT MEANS:  As expected, home construction faltered in April.  Multi-family projects were cut back more than single-family, but both were down massively.  Regionally, the differences were fairly large, though every area posted a decline. Starts fell by “only” 14.9% in the Midwest, were off 26% in the South and cratered by over 40% in both the Midwest and Northeast.  But these data need to be put into perspective.  Construction was really strong going into the pandemic and the total number of units started during the first four months of this year was still up sharply over the same period in 2019.  That was in spite of two months of huge declines.  The only area where activity was down during the first four months was in the Northeast and that decline was modest.  Looking forward, permit requests were not off as much as starts and the gap between the two grew dramatically.  As I have noted in the past, builders don’t pay for permits just to have them sitting around.  Indeed, homes permitted but not yet started were down from the April 2019 level, so there is not a great backlog. From the peak set in January, April housing starts were down 45%.  That provides lots of room for improvement, especially since permit requests were off only about 30%.  So look for activity to rise going forward.

IMPLICATIONS:The housing market was leading the way until the pandemic shut things down.  Where it goes from here is not totally clear but it is likely that April was the cruelest month for this sector as it was for just about every other one in the economy.  Mortgage rates are down to historic lows and demand seems to be reviving.  But the problem is buyer uncertainty about making a purchase in this environment.  That consists of both the willingness to visit homes and the ability or readiness to commit to the largest purchase they make.  Listings are dropping like rocks and it is not clear that virtual tours do it for many or even most buyers.  That is less of an issue for new-home buyers, but still a concern. Starts were at such a low level in April that it is still likely that residential construction will be off by at least 25% this quarter and it could take a year or more to get back to the January peak pace.  Meanwhile, back in the markets, investors keep searching for the positive and are largely dismissing the negative as being a remnant of the past.  That is what has powered the massive upturn, not any hard evidence that a vaccine will be ready anytime soon or that opening up in the random way we are doing it will be safe.  Hope may run eternal, but it is reality that counts.  Here is a story I like to tell.  In the early 1980s, I attended a U.S. House of Representative hearing on oil shale production.  An industry representative was asked how long it would take to start producing oil.  Remember, the country was desperate for domestic supply given the oil embargoes of the seventies.  The answer was, if everything goes right, about twelve months (at least that is what I remember).  Nearly forty years later, we are still waiting.  Actually, we no longer care.  There is nothing wrong with hoping for the best, but it is always best to plan for the worst.  I am not sure investors are doing that.  They seem to be hoping for the best and planning for even better.