Housing Continues Rebound, Skyrockets in July
In July, for the third consecutive month, new residential construction increased at a double-digit rate — a faster pace than any month in the previous four years. In fact, last month, housing starts jumped by 23% to reach an annual rate of 1.496 million units, which is closer to the level of activity last seen in February, before the economic shutdown took place.
Both components (single-family and multifamily) of new housing contributed to the gain, although the biggest increase was in the multifamily segment. The number of multifamily starts rose by 58% in July to a total annualized pace of 556,000 units; this pace is faster than June’s figure by nearly 200,000 units. Despite this, as seen in the chart below, the level of multifamily starts is still shy of the 628,000 units (annualized) reached back in January.
Single-family starts have similarly rebounded, to an annual rate of 940,000 units, although they are just a more modest 8% higher than the previous month. They also lag the pace seen at the start of the year, but the positive trend is clear.
The strength in the new residential segment has given hope for a general economic recovery. Of course, this is assuming that there’s not another virus-related business shutdown. Still, many segments of the U.S. economy remain at depressed levels, which is highlighted by the elevated number of unemployment claims that continue to be filed week after week. Last week, for instance, the number who filed for benefits rose to 1.11 million people, an increase of 14%, or 135,000 more, from the previous week.
Furthermore, the good news in new housing construction is not shared equally across the nation. Even though housing starts rose in all four regions last month, the gains in the Midwest and West lagged significantly behind the South and Northeast.
Total housing starts in the Midwest and West were 6% higher in July than the previous month, while in the Northeast and the South, they rose more than 30%. The strong increase in the South is important, since this region accounts for more than half of new housing starts.
Housing construction through June in most Southern states is ahead of last year, with notable exceptions including Georgia, where housing permits were 12% lower than in 2019. In fact, the majority of states have issued fewer housing permits in 2020 than last year. Such is particularly the case of the more populous states, like California and Washington.
Year-to-date, counting the actual number of houses started between January and July, housing is 5% ahead of last year, despite the shutdown. To date through July, a total of 763,000 housing units have been started, up from 729,000 during the same period of 2019.
The improvement is evident across all regions and segments, except for single-family construction in the Northeast that year to date is 2% below the same period of last year.
Who Calls the Shots on Products for New Homes
Any builder or contractor who starts construction of a new house builds with one of three intentions: for sale based on speculation or pre-selling to consumers from a model home or plans; Contractor-built homes, or homeowner-built houses.
In July ,74% of the new single-family houses were built with the intent to sell (the first category). This share has fallen over the last three years by one percentage point. But, as the chart below shows, the share of spec homes was as low as 64% 10 years ago.
The second category of homes are those built by a contractor, on land that is owned by an individual for his or her use. Contractor-built homes currently comprise 14% of new single-family homes, but in 2010, they accounted for 20%.
The last category is homes where the homeowner acts as the contractor. They account for just 6% of the homes and, again, their share has fallen over the last decade.
This differentiation in the purpose of why homes are built is important because it helps explain who the decision maker is for the products that go into the home. Over the last few years, the individual homeowner has had much less influence on the kinds of products being used in new homes. Since the proportion of homes built for sale has increased, despite the small drop over the last three years, the builders’ relative influence is greater today than a decade ago. The builder, or building company, has a greater say in the types of products specified in the homes.
Mortgage Rates Edge Higher
Mortgage rates remain at historically low levels, even though they increased minimally last week. The 30-year, fixed mortgage rate was just a shade under 3%, while both the 15-year fixed (at 2.54%) and the adjustable rates (2.91%) are comfortably below 3% as well.
Such low rates will continue to favor new residential construction and home remodeling, as long as other conditions, such as employment, do not deteriorate in the near future. In fact, the Mortgage Bankers Association’s latest weekly survey reveals that mortgage applications for new home purchases increased by 1%.
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 common understood denotes caution because the variable maybe changing direction; and “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. It 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.
Sales of Existing Homes. 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 over. 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 the 30-year conventional loan 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 the 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 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 details.
