April Housing Starts

KEY DATA:  Starts: -9.5%; 1-Family: -13.4%; Multi-Family: -0.8%; Permits: +0.3%; 1-Family: -3.8%; Multi-Family: +8.9%

IN A NUTSHELL: “Home construction may have moderated in April, but with permit requests well above starts, the slowdown should turnaround quickly.”

WHAT IT MEANS:  The housing market is on fire, at least as far as prices are concerned.  As for home construction, that is a puzzle.  It was expected that housing starts would rise in April, even though the March level was already extremely high.  Instead, it dropped sharply, as single-family construction cratered.  Multi-family activity was down only modestly.  But the data were bizarre.  Starts were up in the Northeast and the West, but there was a massive 34.8% falloff in the Midwest and a large 11.5% drop in the South.  Why the declines were so large in the South and Midwest, I have no idea, other than to say we should wait to see what the May numbers look like.  And my guess is that construction will rebound sharply.  Permit requests remained robust in April and for the past three months, they have run, on average, about ten percent above starts.  Builders don’t pay for permits so they can sit around, so look for a construction to jump in the next few months.  Much of that, though, will likely be in multi-family units, as single-family permit requests are running just over two percent more than starts. 

Yesterday, the National Association of Home Builders released its May Housing Market Index and confidence remained at an extraordinarily high level.  It may have come down from the all-time high of 90 (out of 100) set last November, but that is misleading.  The May reading of 83 is eleven points above the high seen during the housing bubble.  The housing market is just fine.IMPLICATIONS:The issues facing housing is supply, or a lack thereof, and as a result, prices.  The number of homes under construction is rising minimally and the number of homes completed fell in April, so buyers will still have a tough time of it, especially since prices will likely continue to rise.  That is true for both the new and existing market.  In the new home segment, there is not only a shortfall of homes available to be purchased, but construction costs are surging.  A lack of labor and rising materials costs, when coupled with higher demand and rising mortgage rates is not good news for buyers.  This sector is an example of the problems with the global supply chain that have erupted since the pandemic hit.  The interdependence of suppliers across the world was put under tremendous pressure by the pandemic, which hit countries at different times and magnitudes.  A breakdown in multiple areas, coupled with the limited number of suppliers, has led to a massive shortage of a wide range of products.  On top of that there were trade barriers constructed and trade wars that further hurt the free flow of goods.  How long it will take to get the supply chain back to normal is anyone’s guess.  That is really troublesome as countries reopen and demand surges.  We are not talking about a normal rise in consumption and production, but a sudden acceleration.  Without the ability to ramp up supply, demand will continue to outstrip supplyand as every economics 101 professor will tell you, that means prices will rise.  That will likely continue until the supply chain is operating efficiently.  Since that is dependent on how long it takes for the pandemic to fade, it is impossible to put a time frame on it.  Investors need to start getting used to higher inflation, and while the Fed may not move anytime soon, market rates almost certainly will.