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Housing starts fell in May: Why homebuyers should care

Housing starts dropped 5.5% in May to a seasonally adjusted annual rate of 1,092,000, according to a report released June 16 by the U.S. Census Bureau.
6/22/2017 10:06:21 AM

Housing starts dropped 5.5% in May to a seasonally adjusted annual rate of 1,092,000, according to a report released June 16 by the U.S. Census Bureau. Building permits were also down, falling to an adjusted annual rate of 1,168,000, compared to the 1,228,000 seen in April.

In a press release, the National Association of Home Builders noted these statistics didn't come as a surprise to many in the construction industry. In fact, they closely reflect builder sentiment in recent months. Granger MacDonald, chairman of the NAHB, explained that, despite the strong start to the year, these numbers demonstrate weaknesses in the market.

However, MacDonald also noted positive economic reports and a need for increased housing will likely sustain the industry and will continue to encourage more new home construction.

"Ongoing job growth, rising demand and low mortgage rates should keep the single-family sector moving forward this year, even as builders deal with ongoing shortages of lots and labor," added MacDonald, who works as a home builder and developer in Texas.

But, despite the optimism the chairman feels, many economists and investors are wary. Reuters pointed out May's drop represents the third consecutive decrease and the lowest level of starts in eight months.

Many believe a shortage of land and skilled workers are the two main causes of the slowing output of newly built homes. But regardless of the cause, the effect is still the same: too few homes available for the fast-growing demand.

Why housing starts matter

Housing starts are the number of soon-to-be newly built homes that have broken ground during a particular month. Many people, including economists, investors and homebuyers, closely watch how many housing starts there are in any given month. There are two reasons for this.

First, housing starts can be viewed as an economic indicator. Rising housing starts is a symptom of higher employment rates and greater access to disposable income, which means more consumers may be considering taking out a residential mortgage. Therefore, higher numbers of starts indicates a strong economy, explained.

It's important to keep in mind, though, that this is an imperfect model. While increasing housing starts is a good sign, it's not necessarily a direct reflection of the economy. For example, today's economy seems to be doing well; the Fed recently increased the federal funds rate once again, and unemployment was happily settled at 4.3% in May, according to the Bureau of Labor Statistics.

Despite these positive signals, among others, housing starts decreased between April and May. But, as pointed out, starts aren't just dependent on the economy and spending ability. Weather plays a big role, as well as other factors, like physical space to build and skilled workers to hire.

New homes bolster the national supply

The second reason people watch housing starts is more directly tied to the real estate industry. More houses means there's more inventory. And, with approximately one-third of homebuyers stating they'd prefer a brand new home, new construction means there's the right kind of inventory to bring buyers in.

In today's climate, inventory is more important than ever. According to the most recent existing home sales report from the National Association of Realtors, inventory in May was 8.4% lower than it was during the same month one year earlier. Homes are being sold in record time, often at quickly escalating prices.

"Those able to close on a home last month are probably feeling both happy and relieved," Lawrence Yun, NAR's chief economist, observed. "Listings in the affordable price range are scarce, homes are coming off the market at an extremely fast pace and the prevalence of multiple offers in some markets are pushing prices higher."

Though home sales increased 1.1% in May compared to April, they aren't as high as they should be, given the demand realtors are seeing across the country.

"Current demand levels indicate sales should be stronger, but it's clear some would-be buyers are having to delay or postpone their home search because low supply is leading to worsening affordability conditions," Yun noted.

Given this trend, it's clear that more housing starts are needed to balance the growing demand with, what is right now, a dwindling supply.

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