Housing Starts Disappoint in December
Contrary to most expectations, total housing starts fell 8% last month to a disappointing 1.19 million units, at an annualized rate.
This is primarily attributable to a nearly 12% decline in single-family starts, shown in the chart below, while construction of multi-family housing units actually rose a modest 1.4%. The decline in single family to an annual rate of 836,000 units more than cancels the previous month’s gain, which saw a spike to a rate of 948,000 units.
Despite last month’s drop, the level of single-family activity is still just a shade below the average maintained over the preceding 12 months, which was 848,000 units.
The chart also shows that housing permits actually rose further in December, up 1.8% to a rate of 881,000 units. Housing permits have been increasing, albeit modestly, in the latest four months, perhaps signaling a rebound in housing starts. Builders do not generally go through the trouble and expense of applying for housing permits unless they have some confidence that they will be able to build and sell the new houses.
Consumers Are Less Optimistic
According to the University of Michigan’s Survey of Consumer Sentiment, consumers are evaluating current economic conditions in January less favorably than they did in December. The overall index fell to 94.4 in January, down 1.6% from the previous month. And, as the chart indicates, the index has been declining steadily since October, when it posted 100.7.
Curiously, the index is driven by consumers’ assessment of current conditions, which fell 4% from last month, while they continue to have positive expectations for the future. The latter opinion is driven partly from a positive view on tax reform. It appears that the negative views stem from the uncertainty about the delayed impact of the tax bill.
Mortgage Rates Continue to Rise
Along with the general rising trend in yields of commercial loans and Treasury bills, the average mortgage rate (fixed rate on a 30-year loan) increased further last week to 4.04%. This is the highest posted rate since May 2017, and most observers expect that it will start to make a dent in the housing markets.
Higher rates, however marginal their increase, will exclude some households that either won’t be able to qualify for a loan, or decide that the option to rent a house is financially a better proposition, given the higher rates.
This is another hurdle for an anemic housing market, though.
Two of the changes in the tax law enacted last month — a $10,000 limit on the deduction for property taxes, and the reduction of the mortgage interest maximum to loans under $950,000 — will have an impact on housing. But it will be mostly on high-end, more expensive houses, since the average new home is priced at roughly $360,000. The property tax on such a home, even in high-tax states like New York, is generally under $7,000 a year — well below the limit stated in the new Federal tax law.
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 $750,000 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, for instance.
We hope that you find this dashboard useful as a general guide to the state of our industry. Please contact us if you would like to see further detail.
