US Housing and Macroeconomy


The latest data on US housing starts and home building has provided some insight into the current state of this very important sector for the general US economy. As one of the most important inputs into new home building costs, North American softwood lumber prices are an excellent indicator of near- and mid-term expectations for US construction activity.

Wrote Bill McBride on Calculated Risk October 24:

“For the economy, what we should be focused on are single family starts and new home sales. As I noted in Investment and Recessions “New Home Sales appears to be an excellent leading indicator, and currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight.”

Since McBride wrote that post, new home sales and housing starts have weakened.

For the bottoms and troughs for key housing activity, here is a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP. The arrows point to some of the earlier peaks and troughs for these three measures:

SOURCE: Calculated Risk

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

RI as a percent of GDP has been sluggish recently, mostly due to softness in multi-family residential.   And it is too early to say that single family housing starts and new home sales have turned down.

Also, look at the relatively low level of RI as a percent of GDP, new home sales and single family starts compared to previous peaks.   To have a significant downturn from these levels would be surprising.
Read more at https://www.calculatedriskblog.com/2018/10/housing-and-recessions.html#HkgwQY2LImwUTofY.99

Elsewhere, year-on-year measures of housing starts, permits, and existing homes data show 2018 as ahead of last year, but month-to-month, the last few months’ direction at the macro level has started getting people nervous in spite of economic momentum, especially in a broad context of volatility and political turmoil, explained Builder Online September 24.

National Association of Home Builders chief economist Rob Dietz unpacked some of the consternation on August’s fall-off in single-family permits by looking further into data on the relationship of permits to the start of construction on new homes.

Zelman & Associates notes:

“According to our contacts, 35% of this year’s land investment dollars are being spent on future entry-level communities, which compares to a current share of deliveries for the same group at 30%. Translating today’s investments into future units, we estimate that this differential implies entry-level housing production will be expanding at a rate roughly twice the overall market.”

What builders and their design, development, investment, construction, and distribution partners must assess–and make urgent choices about–are risks to their individual business models of having input costs imperil their profits, or risks to the entire housing ecosystem of having unmet need for affordably-priced new homes doing big damage to the housing recovery itself.

The Autumn of 2018 will go far toward revealing individual firms’ resiliency in light of these challenges, and the housing cycle’s sustainability beyond a few more months that comp positively with year-earlier data points, said Builder Online.