US homebuilding fell to a nine-month low in June and building permits declined for a third straight month, dealing a blow to the housing market as it struggles with an acute shortage of properties available for sale.
Housing starts tumbled 12.3% to a seasonally adjusted annual rate of 1.173 million units last month, the Commerce Department reported yesterday. That was the lowest level since September 2017. The percent drop was the biggest since November 2016.
Housing starts data for May was revised down to show starts rising at a 1.337 million-unit rate instead of the previously reported 1.350 million-unit rate. Housing starts fell in all four regions of the country last month. Building permits dropped 2.2% to a rate of 1.273 million units, to the lowest level since September 2017.
Single-family homebuilding, which accounts for the largest share of the housing market, decreased 9.1% to a rate of 858,000 units last month. Single-family homebuilding has lost momentum since hitting a pace of 948,000 units last November, which was the strongest in more than 10 years.
As the shortage of homes on the market has worsened, home prices have skyrocketed. According to the Census Bureau, the median home price in the US at the end of April was $318,500 while the average price was $394,600. Those prices are up from $275,500 and $321,200 respectively at the end of 2013. In some of the hotter cities, median home prices have soared as much as 40% in the last five years.
[The median price is the middle point of a series of numbers, in which half of the numbers are above the median and half are below. The average price is the sum of all the numbers divided by the amount of numbers in the set.]
Such a rapid gain in home values at a time when wages are rising by only 2% to 3% a year is measurably cutting into affordability. With the Federal Reserve set to raise its short-term interest rates several more times over the next two years, longer-term interest rates, including mortgage rates, will surely rise and further hamper affordability.
Despite that, home-buying demand remains super-robust. There has been a steady buildup in household formation following the Great Recession. Yet many of those new households have not purchased a home, as evidenced by the still historically low homeownership rate.
Pent-up housing demand, therefore, is large. That is why newly listed homes are finding buyers quickly. Multiple bids are happening in many parts of the country. In the 1Q of this year, half of the sellers of newly listed homes found a buyer and a signed contract within a month – a very speedy market. Many homes now sell at above the asking price, especially in hotter markets.
With the significant increase in home prices in recent years, the question is why aren’t more homeowners putting their houses on the market? A major reason is that most homeowners have secured a rock-bottom mortgage rate in recent years, and mortgage rates have moved higher over the last year or so. Thus, many homeowners considering selling realize they would have a higher mortgage rate if they sell their existing home and buy another one.
All bull markets come to an end and such will be the case with the current surge in home demand and prices. However, I would not expect the current trend to end anytime soon. Millions of Millennials (the largest generation) delayed buying homes due to the Great Recession. Now that the economy is booming, they are coming into the home market, and demand is expected to remain strong for at least several more years.
Given that, the only way to truly get more homes on the market is for homebuilders to construct more new single-family homes and condominiums. Yet there have been several reasons that homebuilders have been slow to add new inventory. There are some things that can be done to address this. They include:
- Provide regulatory relief to community banks that lend to builders;
- Relax land use and zoning rules and “not in my backyard” policies;
- Train more workers in the skills required in home construction;
- Eliminate lumber tariffs & no new tariffs on home construction materials; &
- Restrict frivolous condo construction defect lawsuits against builders.
Several of these options are controversial and/or require political action. Plus, the economy is on-track to strengthen in the second half of this year and next year. As a result, I don’t see much coming down the pike to relieve the housing shortage. It could even get worse.
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