October 30, 2019

Hot starts: Will new homes continue to surge?

Construction on new houses jumped unexpectedly by 12% in August, accelerating to the fastest pace in years as the multi-family market stabilized and mortgage rates dropped, despite an otherwise volatile economy.

Housing starts increased to an annual rate of 1.36 million, up from a revised 1.22 million in July, and permits to build additional homes rose 8% to a seasonally-adjusted annual pace of 1.42 million.

Construction of multifamily properties boosted overall housing starts, jumping 30% to an annual rate of 424,000. However, the more modest 4% jump in single-family starts to 919,000 was the most since January.

Multi-family starts cooled in September, but residential starts rose another 0.8%, and are up 2.8% from the rate one year ago.

Better prices are one reason. Despite lower mortgage rates, the median home price fell in August for the first time in 16 months to $309,000. That's down 1.8% from July, though still up 4.9% year over year.

Affordably-priced homes get snapped up fast, as they're in short supply. Sellers who aren’t getting the price they want can either resort to price cuts, or pull their properties off the market entirely.

That means potential homeowners on a budget may delay their home search until more listings return in the spring.

With mortgage rates still very low, it looks like builders are betting that new housing can step in to fill the demand void. They’re looking to capitalize in the months ahead by increasing home-building activity.

The National Association of Home Builders’ monthly confidence index increased one point to 68 in September, matching the highest reading in a year.

Scarce developable land and high home prices makes their job harder, but at this pace, the new home market is on track for the best sales year since 2007.

Builders, however, continue to focus most of their efforts in the "move-up" market, even though a huge chunk of the demand is coming from the entry level customer.

Analysts suggest that with more imagination, builders could find profitable ways to build more micro-units or redevelop moribund retail space for lower cost condominiums and apartmetns.

"Big builders are doing well," said National Association of Realtors Economist Lawrence Yun. "But we need many, many small builder to get into the market (to) provide more competition."

Though the pace of home building remains relatively low, it’s improving, and Fannie Mae says housing should make a positive contribution to the gross domestic product (GDP) in the third quarter of 2019 for the first time since 2017. Analysts expect a 1.0% increase in home sales this year and 2020.