Housing Starts Data Shows Positive Signs for the Market

Blog posted On October 26, 2021

Last week, the U.S. Census Bureau reported that housing starts and building permits saw respective declines of 1.6% and 7.7% in September. Typically, this data would have negative connotations for buyers and builders alike. A slowdown in housing starts can suggest a slowdown in construction – which is the last thing the real estate industry would need right now. Home prices are already soaring, and if housing construction slows, this could put even more upward pressure on prices. Luckily, the month-over-month construction data is only telling a small part of the overall story. The long-term data shows a much more positive trend.

When the COVID pandemic broke out in early 2020, virtually everything shut down. Schools, offices, restaurants, and seemingly everything else was completely changed as the world tried to determine what to do next. As the world shut down, people began to shut in. The economy struggled. Housing experts predicted the industry would struggle due to decreased buyer demand. Lumber mills shut down, home builders slowed down, and housing starts took a sharp tumble. From February 2020 to April 2020, housing starts slipped 41%. Existing home sales, which make up the majority of total home sales, dropped 26.3% during that same time frame.

Then the unexpected happened. The demand for homes skyrocketed. Record-low mortgage rates sent eager buyers rushing into the market. Existing home sales soared at a record pace. Homes were flying off the market, and buyers were still hungry for more. By that time, housing construction was already behind due to COVID-related slowdowns, so it’s no surprise that home builders jumped into action. From April 2020 to March 2021, housing starts climbed by over 50%. Since March, housing starts have largely trended downward with varied monthly increases. Though many might interpret this data as a negative sign for the market, it’s quite the opposite.

If you’re looking at the data strictly from the month-over-month view, you’ll see a decline. Even compared to earlier this year, you’ll see a decline. That’s because in March 2021, housing starts spiked to a 15-year high. New home sales soared to a 15-year high in January, so it’s likely construction was starting to pick up. Since then, new home sales have generally declined, with a slight seasonal spike this summer.

This doesn’t mean that the market is crashing. In fact, it simply shows that the market is finally stabilizing. After the COVID-related drop in construction activity and the subsequential spike in make-up production levels, we are finally starting to see a moderation. Last week, the National Association of Home Builders (NAHB) released their October housing market sentiment index, which reached a level of 80 for the first time in three months. This was a pretty notable four-point jump from its level of 76 in September considering its minimal one-point increase the month before. From July to August, the index had fallen by five points. To many housing professionals, the increase in builder confidence was shocking. With the supply chain issues and drop in housing starts and building permits, many would have expected builder confidence to drop as well. However, experts like HousingWire’s Logan Mohtashami think that this builder confidence makes sense. “A lot of this rebound in the builder’s confidence I believe was due to the last two new home sales reports confirming and stabilizing the monthly supply data,” Mohtashami explains. “Even though this data is historically high, I would have you focus on the rate of change of this data line now that the moderation from the COVID-19 surge in a few housing data lines levels has been completed.”

So, what does this mean and why is it good? The fact that the market is stabilizing moderately is a huge win. After a housing boom like we saw last year, many feared that a bust would follow. It reminded many people of the boom we saw prior to the Great Recession in 2007-2008. The housing market was thriving prior to that period. It seemed to pick up speed and success very fast. Unfortunately, it all came crashing down just as fast – sending the industry and the economy into one of the biggest economic slumps since the Great Depression. So gradual moderation in the pace of sales and construction is huge. “What that story is telling us is that we have enough demand to keep building homes in America,” writes Mohtashami. It may not seem like a big deal, but for those of us who remember 2008, it is. And hopefully, as the market continues to stabilize, so will home prices and availability.

If you’re interested in learning more about the current market trends, let us know and we would be happy to talk.

Sources: CNBC, HousingWire, PR Newswire, PR Newswire, U.S. Census