Single-Family Housing Continues to Gradually Ramp Back Up

Overall housing starts fell 2.8 percent in October, but the entire drop was in the volatile multifamily sector, which tumbled 15.4 percent. Starts of new single-family homes rose 4.2 percent to a solid 696,000-unit pace.

Slow But Steady Improvement in Single-Family Construction

Housing starts fell 2.8 percent in October but September’s previously reported 6.3 percent gain was revised up to a 7.8 percent increase. With the upward revision, the three-month moving average of starts has been above the critical 1 million mark for the past two months. Moreover, permits rose more than expected, climbing 4.8 percent, with both single-family and multifamily permits rising for the second month in a row. Characterizing the state of this housing recovery has often been an exercise in futility. The epic housing boom and bust, and subsequent changes in the mortgage market, have made for an exceptionally slow recovery, particularly in the single-family market, where construction is modestly above the lows hit during the recession. Construction of apartments has been a notable bright spot, and starts of projects with 5 units or more have actually surpassed the highs hit during the two previous cycles.

The momentum now appears to be changing. Apartment vacancy rates have begun rising, however, and the pace that rents are increasing has been decelerating as more units come to market. By contrast, demand for single family homes appears to be on the upswing. Yesterday’s  NAHB/Wells Fargo Home Builders Index showed solid improvement in perspective buyer traffic and expected future sales. Stronger job growth, declining unemployment and a steady rise in job openings also suggest that more households are feeling more comfortable about their employment and income prospects. The improvement in employment conditions may be a precursor to a rise in relocations, which have largely been missing in action and are very important to the residential development process.

Single-family construction has been gradually ramping up for the past year, but has caught some momentum over the past few months. Starts took a fall late last summer after a slew of cancelations following last spring’s spike in mortgage rates. While mortgage rates remain low today, the driving force behind recent gains appears to be improving labor market conditions. Single-family starts rose 4.2 percent in both September and October and are up 15.4 percent from last October. Permits for new singlefamily homes rose 1.4 percent in October following a 0.6 percent rise in September and are up 2.4 percent from their year-ago pace.

We are now entering the seasonally slow period for homebuilding, so monthly gains at this time of year need to be taken with a grain of salt. Through the first ten months of this year, single-family starts are running 5.3 percent ahead of their year-ago pace, which is close to what we expect for the year as a whole. Multifamily starts through October are running 18.7 percent ahead of their year-ago pace. We expect the leadership to flip in 2015, with single-family starts finally taking the lead.