Housing starts are a critical predictor of future home builder 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 home builders, 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 were started in a given period. For multi-family units, each individual unit is considered to be a housing start. If there is a lot of multi-family construction happening, then housing starts can become elevated and care must be taken not to read too much into the builders of single-family homes.
Multi-family construction drove the increase
Housing starts rose from 856,000 to 914,000. If you look closely at the numbers, it was all multi-family (5+ units) that drove the increase. Multi-fam starts were 245,000 in April and increased to 306,000 in May. Single-family starts increased modestly from 597,000 to 599,000. Single family starts have been much more stable than multi-family starts and have exhibited a steady rise.
Starts fell in the Midwest, from 153,000 to 132,000, with an exceptionally wet May depressing numbers. Starts rose markedly in the South from 416,000 to 490,000.
Right now, there is 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 and are competing with the likes of Blackrock (BLK) and Blackstone (BX) for starter homes.
While 914,000 is quite a jump compared to a few years ago, relative to historical numbers it is quite low. From 1959 to 2002, housing starts averaged about 1.5 million units a year. In fact, housing starts typically bottomed at a million units during recessions. The fact that we only recently cracked the one million mark shows just how deep this housing recession was.
Implications for home builders
Today’s report had a negligible impact on the performance of the Home Builder ETF (XHB), which was up modestly with the market. This was undoubtedly due to the fact that multi-family drove the increase and not single-family homes. Home builders 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. Only NVR disappointed due to its geographical focus on the East Coast. Other homebuilders like Lennar (LEN), KB Homes (KBH), Standard Pacific (SPF), and Toll Brothers (TOL) reported large increases in orders and backlog.
Right now, the difference between renting and buying is about the widest it has ever been. When one considers the difference between median house prices and median rents, purchasing is cheaper. Rock-bottom interest rates and low prices for starter homes are making home ownership very affordable. As the job market improves for younger adults, those that are currently renting will contemplate home ownership. The Obama Administration has been pushing banks to lend more and to use FHA loans for first-time home buyers. FHA loans require only 3.5% down, so they are perfect for the first time home buyer. This move from renting to purchasing will help home builders in the long-term.