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Housing: Single-family starts, rising home values provide shot in the arm

June 26-July 2, 2018: Volume 34, Issue 1

By Reginald Tucker

 

By many accounts, 2017 was a stellar year for residential construction—the best since 2007, some observers say. That’s due in large measure to robust activity in the single-family sector, which serves as a general barometer reflecting the health of the U.S. housing market.

According to the U.S. Census Bureau, housing starts reached a post-recession annual high of 1.203 million units in 2017—the most in a calendar year since 2007. As expected, single-family

led the charge, climbing more than 8.5% from 782,000 units in 2016 to 849,000 in 2017. By comparison, multi-family starts fell 10% from 380,700 in 2016 to 342,400 last year.

Figures supplied by the National Association of Home Builders (NAHB) showed housing starts in the South region accounted for the bulk of new builds, rising 2.5% from 585,000 in 2016 to nearly 600,000 last year. The West region came in second with 313,000 starts, a 7.5% uptick over 2017. Starts in the Midwest fell 1% to 180,000 units, followed by the Northeast, where starts dipped 4.3% to 111,000 units.

While 2017 was
the best year for homebuilding in a
decade, much of
the inventory
crunch confrontinghomebuyers over
the past two years
is reflective of the
dearth of homebuilding since the recession, according to Trulia, which tracks new home sales, construction trends and real estate interests.

To put the past year into perspective, permits, starts and completions relative to the U.S. population were just 64.9%, 58.8% and 57.9%, respectively, of the 50- year average.

Total housing starts was not the only metric on the rise. The value of the entire U.S. housing stock increased by 6.5%, or $2 trillion, in 2017, according to a report from Zillow. Homes in the United States are now cumulatively worth $31.8 trillion.

The gain in home values was the fastest since 2013, when real estate was in the early stages of its recovery from the Great Recession. Los Angeles is the most valuable U.S. housing market, valued at $2.7 trillion, according to Zillow’s estimate of owner-occupied and rental homes, while New York, valued at $2.6 trillion, came in second. By Zillow’s count, the 10 most valuable metropolitan areas are worth $11.3 trillion combined, or 36% of the total value of the U.S. housing stock.

According to the National Association of Realtors (NAR), the national median existing single-family home price in the fourth quarter was $247,800, up 5.3% from a year ago. Ninety-two percent of the markets measured by NAR saw an uptick in single-family home prices, while 26 metro areas, or 15%, saw double- digit increases. Home prices are now at their all-time high in 64% of the markets NAR tracked.

“A majority of the country saw an upswing in buyer interest at the end of last year, which ultimately ended up putting even more strain on inventory levels and prices,” noted Lawrence Yun, NAR chief economist. “Remarkably, home prices have risen a cumulative 48% since 2011, but incomes are up only 15% during that time frame. In the West region, where very healthy labor markets are driving demand, the gap is even wider.”

How that trend bodes for 2018 and into 2019 remains to be seen, observers said. Among other things, they point to the new federal tax law that reduces key benefits to home ownership. This includes a lower limit on the amount of debt eligible for the mortgage-interest deduction and a cap on state and local tax deductions. Those changes, critics say, will likely land hardest on home- owners in coastal markets with high property values (and taxes) and could lead to price declines, according NAR.

Mid-year report
The momentum generated in 2017 has spilled over into this year. Statistics provided by the U.S. Census Bureau show newly built, single-family homes rose 6.7% in May—the most recent period for which reliable numbers are available—to a seasonally adjusted annual rate of 689,000 units. (A reading of 689,000 units translates to the number of homes that would sell if this pace continued for the next 12 months.) More importantly, this is the second-highest sales report since the Great Recession. Throw multi-family starts in the mix and total housing starts rose 5% in May to a seasonally adjusted annual rate of 1.35 million units, the highest since July 2007. (The May reading of 1.35 million units is the number of housing units builders would begin if they kept this pace for 12 months.)

“Sales numbers continue to grow, spurred on by rising home equity, job growth and reports of a greater number of millennials entering the single-family housing market,” said Randy Noel, NAHB chairman.

Robert Dietz, NAHB chief economist, agrees, adding that ongoing job creation, positive demographics and tight existing home inventory should spur more single-family production in the months ahead. Year-to-date, single-family and multifamily production are up 9.8% and 13.6%, respectively, over the same period last year.

“We should see builders continue to increase production to meet growing consumer demand even as they grapple with stubborn supply-side constraints, i.e., rising lumber costs,” Noel explained.

One concern, however, is the dip in permits—the chief indicator of future housing production activity. This metric dropped 4.6% to 1.3 million units in May. Single-family permits fell 2.2% to 844,000 while multi-family dropped 8.7% to 457,000. From a regional review, permits rose 42.1% in the Northeast and 7.2% in the Midwest, but fell 4.6% in the West and 13.9% in the South.

“The softening of single-family permits is consistent with our reports showing builders are concerned over mounting construction costs, including the highly elevated prices of softwood lumber,” NAHB’s Dietz noted.

Meanwhile, the inventory of new homes for sale was 299,000 in May, which is a 5.2-month sup- ply at the current sales pace. The median sales price was $313,000.

“We saw a shift to more moderately priced home sales this month, which is an encouraging sign for newcomers to the market,” said Michael Neal, NAHB senior economist. “Since the end of the Great Recession, inventory has tracked the pace of sales growth. While we expect continued gains in single-family housing production, inventory may be partially constrained by ongoing price increases for lumber and other construction materials.”