Housing starts are a critical predictor of future homebuilder sales
Housing starts are released jointly by the Census Bureau and the Department of Housing and Urban Development. Analysts use the information to anticipate future production for homebuilders, future demand for raw materials, and labor costs. This data will even affect the forecasts for home-related retailers, like Lowe’s and Home Depot.
Housing starts cover the number of privately owned housing units that started in a given period. For multi-family units, each individual unit is considered a housing start. If there’s a lot of multi-family construction happening, then housing starts can become elevated, and investors must take care not to read too much into the builders of single-family homes.
Single-family and multi-family starts both fall
Housing starts fell from 1,048,000 to 880,000. Multi-family and single-family starts both decreased. Multi-family starts were 300,000 in January—a considerable decrease from the 344,000 pace in December. Single-family starts decreased from 681,000 to 573,000. Single-family starts have been much stabler than multi-family starts and have shown a steady rise.
Starts were flat the Northeast, but all other geographic areas experienced decreases
Right now, there’s a boom for rental properties as institutional investors chase the high single-digit rental yields that are available. This is making life more difficult for young adults, who find themselves most vulnerable in the job market, struggling with student loan debt. Rental properties are competing with the likes of Blackrock (BLK) and Blackstone (BX) for starter homes.
This is the first time in a while that we’ve seen a year-over-year decrease. Bad weather was to blame for the drop. This number is well below historical averages. From 1959 to 2002, housing starts averaged about 1.5 million units per year. In fact, housing starts typically bottomed at a million units during recessions. The fact that we only recently cracked the 1 million mark shows just how deep this housing recession was.
Implications for homebuilders
The report had a positive impact on the performance of the Homebuilder ETF (XHB), but everything was pretty much up on the FOMC announcement. The drop in multifamily starts is good for the builders because they compete with rentals for new household formations, and as the supply of rental properties increases, rents should fall relative to house prices. This could negatively affect new home pricing at the margin. However, that has yet to become evident in the earnings of the homebuilders, which were generally quite strong. So far, homebuilders have been reporting decent earnings. We’ve seen big increases in gross margins from Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL).
Right now, the difference between renting and buying is still extremely wide by historical standards. When you consider the difference between median house prices and median rents, purchasing is cheaper. Rock-bottom interest rates and low prices for starter homes are making homeownership very affordable. As the job market improves for younger adults, those who are currently renting will contemplate homeownership. The Obama Administration has been pushing banks to lend more and use FHA loans for first-time homebuyers. FHA loans require only 3.5% down, so they’re perfect for the first-time homebuyer. This move from renting to purchasing will help homebuilders in the long term.