Housing Starts Soften from December but Remain at Post-Recession High

For the second consecutive month, builders started houses at an annual pace of roughly 1.6 million units, a rate not seen in more than a decade. In fact, this level of housing construction was last seen in early 2007, when the housing markets were deteriorating. But the recent strength signals perhaps a more robust year for housing starts than has been generally predicted. Most forecasts have hovered around 1.3 million new housing units for 2020.

Construction of both single- and multifamily units contributed to January’s gains, with single-family starts remaining just above 1 million units (annualized), although at 1.01 million units, it is 6% lower than December’s rate. Multifamily construction, on the other hand, was modestly higher than in December, by less than 1% to a rate of 557,000 units.

Despite last month’s decline in total and single-family starts, they actually follow the positive trend that began a year ago. Total housing starts were 21% higher last month than their level in January 2019. Single-family starts were up a more modest 4.6% compared to a year ago, but multifamily is a remarkable 71% higher. Note January’s single-family starts spiked last year, when they jumped suddenly to an annualized rate of 966,000 units from an average of 850,000 in the previous six months, making this year’s comparison — 4.6% — relatively small.

Housing starts also fell in two of the four U.S. regions, but all four regions have a strong positive trend for over a year now, as shown in the chart below.

The Midwest had the sharpest decline in housing starts, just under 26%, but this drop cancels the sharp increase we saw in December, when starts had jumped by 41%. This spike is reflected in the chart below.

The other region with fewer housing starts in January is the all-important South, down 5.4% to a rate of 778,000 units. The South accounts for half of all U.S. housing starts.

Home Sales Also Slip in January

Similar to housing starts, sales of existing homes fell 1.3% last month to an annual rate of 5.46 million units. January’s decline nearly cancels the prior month’s increase. Sales have been increasing for virtually a full year now; they finally turned around in January 2019, after being in virtual freefall through most of 2018.

Last month’s decline was driven mainly by a steep 9.4% sales drop in the West, which accounts for one in five homes sold in the nation. Moreover, home sales in the West have stalled over the last six months or so, while the other three regions continue to grow.

Sales in the Northeast and South regions were virtually unchanged from the prior month, while the Midwest enjoyed a 2.4% gain.

Unquestionably, one of the reasons for the lack of sales growth is the relatively low inventory of homes for sale. Last month, there were 1.46 million homes for sale nationally, nearly 11% fewer than a year before. At the current sales rate, the inventory is just sufficient to support three months of sales.

In addition to these low inventory levels, sale prices of existing homes continue to rise. The median sale price of an existing home was $266,000 in January, up a strong 6.8% over the year. The lack of inventory is clearly putting upward pressure on house prices.

The chart above shows that housing prices in the West are significantly higher than those in the other three regions, which has been well documented. They are nearly twice as high as those in the Midwest, which posts the lowest house prices in the nation.

New Homes Are Getting Smaller

Both new single- and multifamily home sizes got smaller last year. The median size of a single- family house built in the fourth quarter of last year was 2,252 square feet, 64 square feet smaller than the same quarter or 2018. Multifamily houses were just 1,053 square feet, but also 81 square feet smaller than in 2018.

But in fact, last year’s space decline just follows the six-year trend of shrinking house sizes that began in 2014. Home builders have reduced the median size of single-family homes by an average of 40 square feet per year since 2014, when they reached a peak of 2,445 square feet. Home builders are responding to what consumers want, which is smaller houses — either for cost considerations or changing lifestyles that don’t demand large homes, like seniors downsizing.

The average (mean) house size has also fallen from a high of 2,677 square feet in 2014, to the current 2,511 square feet, or a reduction of 225 square feet over five years. Recall that the median size is the point where half of new single-family houses are smaller and, conversely, the other half are larger. Also, when the average (mean) is larger than the median, it indicates that there are a disproportionate number of houses higher than the median.

But the median size of multifamily housing units has declined very little since the end of the economic recession. House size peaked at 1,134 square feet in 2013, down to the current median of 1,053 square feet. This is a reduction of just 81 square feet over the last six years.

In the case of multifamily housing units, the average (mean) is just 1,074 square feet, very close to the median. The big spike in the chart below, around the year 2005, reflects the large number of multifamily housing units built for sale, as in condominiums, rather than for rent. The number of these condo units represented almost 50% of all multifamily houses built between 2005 and 2007; today they account for just 6% of all multifamily units.

Naturally, there are differences in house size among the four U.S. regions. Largest houses can be found in the Northeast, with an average (mean) of 2,656 square feet, while the smallest houses are built in the Midwest, averaging 2,397 square feet, which is 259 square feet smaller than those in the Northeast.

The national trend in house sizes naturally follows what is happening at the region level. The average size, both median and mean, of new homes has declined in all four regions since at least 2014.

Mortgage Rates Edge Higher    

Last week brought another modest increase in interest rates, with the 30-year, fixed mortgage rate rising to 3.49%, up just two basis points from the prior week. But despite these increases, which are nearly negligible, mortgage rates remain favorable to the housing markets.

Manuel Gutierrez, Consulting Economist to NKBA

Explanation of NKBA’s Economic Indicators Dashboard

The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.

Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.

Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.

Single-Family Starts.  This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.

Existing-Home Sales. These data are issued monthly by the National Association of Realtors and capture the number of existing homes that were sold in the previous month.

High-End Home Sales. This series are sales of new homes priced at $500,000 and higher. The data are released quarterly by the U.S. Department of Commerce and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.

Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.

Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.

Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.

Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers.

We hope you find this dashboard useful as a general guide to the state of our industry. Please contact us at Feedback@nkba.org if you would like to see further detail.