March Housing Starts and Permits

KEY DATA:  Starts: +0.3%; Over-Year: +3.9%; 1-Family; -1.7%; Permits: +0.4%; Over-Year: +6.7%; 1-Family: -4.8%

IN A NUTSHELL: “Home construction is hanging in there.”

WHAT IT MEANS:  With the 30-year fixed rate mortgage topping five percent for the first time in over eleven years, the future of the housing market is becoming questionable.  For now, home construction is still decent.  Housing starts edged up in March, but the rise came with some doubts.  The entire gain can be traced to a nearly 250% surge in new multi-family construction in the Northeast.  That was a clear anomaly, so we shouldn’t draw any conclusions from the overall rise in housing starts for the nation.  Construction was up in the West but dropped in the Midwest and South.  Looking into the future, there was good news in the report. Permit requests remain well above starts and that is a sign that future construction should be improve.  Indeed, the number of homes permitted but not started keeps climbing and builders aren’t spending money for permits for the fun of it.  Indeed, the number of units under construction is higher than at any point during the housing bubble and the fourth highest on record.    

IMPLICATIONS:With housing supply scarce, builders are stepping into the gap and trying to fill it with new housing units.  That makes sense, as homebuyers are willing to purchase anything available.But there could be some trouble brewing, as mortgage rates are likely to continue rising.  Initially, homes, be they new or existing, should continue selling as buyers make moves before rates get too high.  But eventually, the combination of higher rates and prices should slow demand.  With so many homes under construction and so many more permitted, it is not clear the market will be able to support all that activity.  Is there a bubble building in the new home market?  It isn’t here yet, but the indicators need to be watched closely.  The saving factor is that the existing home market, which comprises over eighty-eight percent of the sales, has few homes on the market.  The much smaller new home market can fill in some of the empty space, but it might take a surge in existing home inventory to create a major bubble in supply.