Census and Sensibility
Headline data for Friday’s housing starts and permits data release show a downward spike, to 1.092 million, a 5.5% sequential (month-to-month) decline.
Calculated Risk blogger and economics observer Bill McBride called this a “weak report and [was] well below consensus,” as he noted that the May 2017 figure was 2.4% lower than the same month a year earlier.
The one month drop has been dissected thoroughly, and has set up some drama looking ahead to Census data releases coming into what many observers expected would ride a “Trump bump” wave of economic positivity–and now they may begin to have second thoughts. An added fillip of angst may come, as experts at Zelman & Associates note in the June 16th issue of The Z Report, that the sequential hiccup for single- and multifamily, starts and permits, has only occurred one other time in the past 60 months (December 2015).
While most housing analysts and investment players are relatively comfortable with the “noise vs. signal” unevenness in the multifamily components of housing starts, permits, and completions activity, sudden directional shifts in single-family can and do generate jitters. That’s when the pros step back and look at a bigger frame of reference.
Here’s Calculated Risk’s McBride with a comment that captures the way most astute housing analysts regard the latest Census data points, and he shows what he means with a chart that blends both month to month single- and multifamily trends year-over-year:
Note that multi-family starts are volatile month-to-month, and has seen wild swings over the last year – and has been especially weak over the last few months.
However, single family starts – although down in May compared to April – were up 8.5% year-over-year.
Now, three most-likely causes explain the one-month decline on the single-family front. They’re likely each to have played some role, although the degree to which each had a bigger effect is arguable.
One of the more benign possible causes for the month-of-May latency in starts and permitting traces to, as Zelman & Associates phrases it, a “pull-forward of activity around the spike in mortgage rates and builders intentionally slowing the pace of new orders through price increases.” If you’re interested in becoming a subscriber to The Z Report, which is a twice-monthly package of original, exclusive data and analysis from the team at Zelman & Associates, you can try it for free by linking here.
The other two explanations for the May mojo slowdown are not as innocent, and may turn up repeatedly in the months ahead as impediments to a more normalized business and operations flow. They’re what National Association of Home Builders chief economist Rob Dietz refers to here as “supply-side bottlenecks.”
Now that more builders are cutting over from emphasis on higher-end, higher-margin first- and second-time move-up homes to entry-level communities, the volume game has been stressing labor capacity. In turn, as Zelman mentions above, builders have been raising prices to meter or “cadence” demand. This labor capacity constraint is not going away, and could remain as a factor in lumpy starts and permits activity for months and months to come.
The third “cause” of the starts slow-down? Lots. There’s too few vacant developed lots in the pipeline, which a) inflates the prices of the ones that do come online because of the number of would-be buyers for the limited number of available lots, and b) suppresses volume momentum despite clear demand.
It’s moments like these–when it looks as if the market’s showing signs of more risk–that organizations who’ve prepared their operations and land acquisition systems for long-known headwinds and stressors double down. In classic Darwinian style, stronger players reap the benefits as circumstances test the very viability of the weaker ones.
Meanwhile, building products and materials suppliers whose service, installation, and quality assurance programs lend greater speed, efficiency, and labor savings also represent a sure competitive edge in a market whose velocity is being held back by labor capacity and lot bottlenecks.