August 18, 2021
Housing starts fell 7.0% in July to a,534 thousand after increasing 3.5% in June and 5.3% in May. Like every other economic indicator, starts have rebounded sharply since the recession ended last April and have far surpassed the levels where they were in February of last year — prior to the recession. Starts would be at an even faster pace but builders have having difficulty finding lumber at a reasonable price, qualified workers, and a lot shortage. Indeed, the elevated price of lumber is adding approximately $24,000 to the price of a new home. And mortgage interest rates remain historically low at 3.0%. There is demand for a faster pace of construction, but supply constraints are curtailing how quickly starts can rise.
One interesting point is that the recent growth in starts has all been in single-family homes. Single-family starts are 7.4% higher than they were in February of last year (just prior to the onset of the recession) while multi-family units are 19.8% below their February 2020 pace. Home buyers and renters are taking advantage of near record low mortgage rates to purchase new homes in the suburbs.
Builders certainly expect the housing market to continue to do extremely well in the months ahead. The homebuilders confidence index for August now stands at 75. Traffic through the model homes has dropped off as some potential buyers are experiencing sticker shock at how high prices have become. Most of the drop-off is for housing priced below $400,000.
One of the factors boosting homebuilders confidence is the fact that mortgage rates remain at a near-record low level of 2.7%.
Building permits rose 2.6% in July to 1,635 thousand after declining 5.3% in June. The January level of 1,883 thousand was the highest level for permits since May 2006. The rising cost of materials seems to be causing builders to slow the pace of construction slightly.
Builders have an increasing number of units for which permits have been issued but construction has not yet begun. That will ensure that builders remain busy from now through the end of this year. Builders report that their costs are rising faster than prices, so they are holding off beginning construction until either their costs decline somewhat or prices rise farther.
The economy continues to open up. Construction workers return to their jobs. Once federal unemployment benefits expire after labor day more workers should become available and the pace of construction will pick up. Mortgage rates have remained affordable at 3.0%. The problem is that builders need more bodies. Our sense is that starts will continue to climb to 1,700 thousand or so by the end of this year. And, for what it is worth, we expect Q3 GDP to climb by 8.9% with 10.5% GDP growth in Q4. That will give us 8.1% GDP growth for 2021 and we anticipate 5.1% growth in 2022..