Housing report

– by a New Deal Democrat

June Housing Report: A Tale of Two Diametrically Opposed Sectors  , Yesterday I wrote that housing starts, along with new vehicle sales, are two important reasons why an economic downturn has not yet occurred. Today’s June housing report showed two almost diametrically opposed trends: Single-family homes saw a sharp increase in permits and housing starts, while homes under construction hit a 12-month low. Conversely, multifamily housing has seen a sharp decline in permits and starts, while units under construction have been at multi-decade highs.

So let’s break down this month’s report into these two categories: single-family vs. multi-family.

Permits (red in the graph below) are the leading metrics, and single-family permits have the least noise and the largest signal of all metrics. They rose by 20,000 year-on-year to a new 12-month high. The start (blue) was down -70,000 y-o-y, but was still close to the 12-month high set last month. But units under construction (gold, right scale) fell -6,000 to a new 12-month low:

The story was completely reversed for multi-family housing. Approvals (red) fell -73,000 to a new 12-month low, and starts (blue) fell -63,000 to a 3rd 12-month low. But units under construction (gold, right scale) increased by 7,000 not only to 12 months, but to another all-time high:

It’s easy to see in the above how the data progresses from permits to start up to units under construction. Since mortgage rates drive permits, below are mortgage rates averaged monthly (inverted) versus single-family permits (red, right scale):

You can see that last year’s big increase in mortgage rates led to a big decrease in permits. A drop in mortgage rates earlier this year led to a temporary increase in permits. I suspect permits will ease slightly again as the recent rate hike back to 7% filters through the system.

But the real economic impact is through units under construction. Below I show the total units under construction (blue, right scale)) as well as the single-family (red) and multi-family (gold) unit components:

Total units under construction are down slightly from their peak (meaning very little effect on the economy), while single-family units are down at recessionary rates. But that was almost completely offset by a record increase in multifamily units under construction. Undoubtedly, the dominant reason for this is the large jump in home prices since the pandemic, which has put the prices of single-family homes out of the price range of many younger potential buyers. Since high-rises and co-ops tend to be cheaper and therefore somewhat substitute goods, that’s where the growth is.

For forecasting purposes, most importantly, in the booming multifamily sector, permits fell to their lowest level since October 2020. Starts are near their lowest level since late 2021. Homes under construction still they haven’t peaked and are probably a few months away from peaking. The exact opposite is true for single family units. Since multi-family construction is over 60% of total activity, and more importantly, because there is a much larger downside to multi-family construction if permits follow, compared to the limited increase for single-family units, I expect downward pressure on the economy as a whole as a result.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *