Real Estate

Experts: Housing starts signal trouble ahead

Inventory and affordability concerns create supply and demand stalemate

In October, growth in housing starts was propelled by development in the multifamily sector, but some experts are warning that there could be trouble ahead for the housing market.

According to the U.S. Census Bureau and the Department of Housing and Urban Development’s report, housing starts increased 1.5% in October, coming in at a seasonally adjusted annual rate of 1.228 million.

While the increase showed improvement, it was still 2.9% below the annual rate of 1.265 million from October 2017.

Single-family housing starts took a hit, dipping 1.8% and standing at a rate of 865,000. Despite this, the multifamily sector climbed to 343,000, an increase from last month’s 324,000.

Experts indicate that affordability concerns and lacking inventory are creating a slowdown in the homebuilding sector.

“If you're looking for a new, single-family home, the news this morning wasn't good,” Navy Federal Credit Union Corporate Economist Robert Frick said. “While housing starts picked up in a bit, the increase is because of more starts in multi-family housing, meaning apartments, attached homes and townhouses. And prospects for an increase in future building sagged – as permits fell 0.6% to a $1.26 annual rate.”

"Those prospects dovetailed with yesterday's dramatic drop in home builder confidence, foreshadowing that builders are seeing a turn in the market for new homes, and are less likely to build.”

The National Association of Home Builders/Wells Fargo latest Housing Market Index revealed affordability concerns contributed to homebuilder confidence falling eight points to 60 in November.

"A number of factors are dropping demand for new homes from potential buyers, including lack of inventory on the market and that since 2010 the median price of a new home is up about 50% while wages are only up about 20%,” Frick continued. “Many home buyers, especially for lower-priced starter homes and mid-priced 'trade up' homes have been gradually priced out of the market. For builders, it's finding buildable lots, labor and the high price of building materials, especially lumber.”

Other experts agree, pointing out that wavering homebuilder confidence might spell trouble.

“Homebuilder confidence, which was released yesterday, fell to the weakest since 2016,” LendingTree's Chief Economist Tendayi Kapfidze said. “Notably, the sub-index for buyer traffic fell to 45, with readings below 50 indicating contraction, this suggests builders will be more cautious about adding inventory going forward.” 

Rising rates, prices and taxes are contributing to the housing slow down. Average mortgage rates rose to 4.94% last week according to Freddie Mac, the highest in seven years. This has made housing about 15% less affordable than a year ago,” Kapfidze continued. “As there are less buyers at each price point, the appropriate market response is a slowdown in sales and an eventual easing in price momentum.”

Realtor.com Chief Economist Danielle Hale said consumers are less optimistic about home buying right now, and builders are starting to notice.

“Looking ahead, starts could slip further if builders believe the consumer pause will continue and they adjust production accordingly,” Hale said. “Rising home prices and rising mortgage rates have created high hurdles for homebuyers while cost increases make it difficult for builders to deliver homes at the price points that are most in-demand. The result has been a stalemate between buyers and sellers, with fewer transactions than we saw a year ago.”

First American’s recent Potential Home Sales Model supported this claim, as Chief Economist Mark Fleming indicated that the year-over-year decrease in potential existing-home sales was attributed to a supply and demand standstill.

“The primary culprit for the housing market’s performance gap remains severe supply shortages – home buyers can’t buy what’s not for sale,” Fleming continued. “While the discussion of rising mortgage rates tends to focus on their impact on the buyer’s affordability, rising mortgage rates create a financial disincentive for existing homeowners with low mortgage rates from selling their homes.”

According to Fleming, this “phenomenon” affects both sides of the supply and demand dynamic, boiling down to those who don’t sell, don’t buy either.

So, what does that mean for homebuilders? Well, PricewaterhouseCooppers’ Principal Scott Volling thinks the rapidly changing demand environment is likely to heighten homebuilder hesitation.

“A recurring theme is that rising interest rates and rising home prices are creating affordability challenges that are causing buyers to take pause and re-assess their situation,” Volling said in response to today’s housing starts report. “With the Fed signaling continued rate increases and minimal price relief in sight, this ho-hum trend appears likely to continue.”

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