Wednesday, February 19, 2014

Housing Starts: Weakness, Weather, Fundamentals

by Bill McBride on 2/19/2014 12:28:00 PM

Is the housing recovery over? Housing starts were down in January (and down slightly year-over-year). The MBA mortgage purchase index is at the lowest level since September 2011. Existing home sales were weak in January (to be released tomorrow). Oh no. Oh no. Is the sky falling?

Short answer: no.

There are several reasons for the recent weakness: weather (probably a small factor), higher mortgage rates, and higher prices (homebuilders raised prices sharply in 2013).  But the fundamentals of household formation and housing supply suggest a significant increase in housing starts over the next few years.

So I'm not too concerned about short term weakness.  As always, fundamentals will eventually rule, and I think that means housing starts will continue to increase for the next few years.

A few key points:

• Housing starts were revised up for 2013, and starts increased 18.7% in 2013 compared to 2012 (revised up from 18.3%).

• Even after increasing 28% in 2012 and 18% in 2013, the 927 thousand housing starts in 2013 were the sixth lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2008 through 2012).   Also, this was the fifth lowest year for single family starts since 1959 (only 2009 through 2012 were lower).   See bottom graphs for single family starts!

• Starts averaged 1.5 million per year from 1959 through 2000.  Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will probably increase another 50%+ from the 2013 level.


The following table shows annual starts (total and single family) since 2005:

Housing Starts (000s)
 TotalChangeSingle FamilyChange
20052,068.3--- 1,715.8---
20061,800.9-12.9%1,465.4-14.6%
20071,355.0-24.8%1,046.0-28.6%
2008905.5-33.2%622.0-40.5%
2009554.0-38.8%445.1-28.4%
2010586.95.9%471.25.9%
2011608.83.7%430.6-8.6%
2012780.628.2%535.524.4%
2013926.718.7%618.315.5%

I expect another solid increase for housing starts in 2014.

Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

These graphs use a 12 month rolling total for NSA starts and completions.

Multifamily Starts and completionsClick on graph for larger image.

The blue line is for multifamily starts and the red line is for multifamily completions.

The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) are lagging behind - but completions will continue to follow starts up (completions lag starts by about 12 months).

This means there will be an increase in multi-family completions in 2014, but probably still below the 1997 through 2007 level of multi-family completions.  Multi-family starts will probably move more sideways in 2014.

Single family Starts and completionsThe second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

Starts have been moving up, and completions have followed. 

Note the exceptionally low level of single family starts and completions.  The "wide bottom" was what I was forecasting several years ago, and now I expect several years of increasing single family starts and completions.

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