With record low housing inventory a persistent problem across the country, Housing Starts and Building Permits are crucial data to monitor each month because they serve as a good indicator of future supply of new homes in the real estate market.
A Housing Start is defined as excavation for the foundation of a residential structure. Building Permits are defined as an authorization to build and are a good indication of future starts.
Within the report there is a distinction between multi-family and single-family homes. Single-family homes are the most important figure to look at because they represent the “life blood” of the housing market and impact the mortgage and residential real estate markets the most.
In a similar vein, monitoring confidence levels among builders can help us gauge how builders are feeling about market conditions. Here we look to the National Association of Home Builders (NAHB) Housing Market Index, which is a near real-time report based on a monthly survey by the NAHB designed to take the pulse of builder confidence. It measures the current month in which it is released, which is why it is considered near real-time data.
The Housing Market Index (HMI) is an index that ranges from 1 to 100. Anything over 50 signals expansion, while anything under 50 signals contraction. It is comprised of three components: current sales expectations, future sales expectations and buyer traffic.
In this article, we’ll analyze the Housing Starts and Building figures for March and April’s builder sentiment data that was released this week, and what they may mean for inventory and the housing market overall.
Housing Starts Increase Overall, But What About Single-family Starts?
Housing Starts increased 0.3% in March at an annualized rate of 1.79 million units. Year over year, Housing Starts were up 3.9%. However, starts for single-family homes, which again are the most important because they are in such high demand among buyers, decreased by 1.7% and they were down 4.4% from March of last year.
Similarly, Building Permits rose by 0.4% last month and they were up 6.7% on a year over year basis. Yet, there were declines here as well for single-family permits, which fell 4.8% monthly and 3.9% year over year.
Speaking to the backlog of homes builders are contending with, single-family units authorized but not yet started were up almost 15% year over year, which is a sign that the backlog is building. And when we take a look at single-family completions, they were down 6.4% monthly and 3.3% annually.
Builder Confidence Declines But Still at Strong Level
Builder confidence fell for the fourth straight month, as the National Association of Home Builders Housing Market Index declined 2 points to 77 in April.
Looking at the components of the index, current sales conditions fell 2 points to 85, which is still very strong, while buyer traffic fell 6 points to 60. Future sales expectations rose 3 points to 73, following the 10-point drop in March.
Again, it should be noted that a reading above 50 on this index, which runs from 0 to 100, still signals expansion.
So, while some of these figures are contracting, they are still at strong levels overall.
So, what does all of this data mean?
Builders are trying to complete homes, but rising costs and ongoing supply chain issues remain a challenge, especially when it comes to completing single-family homes. Jerry Konter, NAHB chairman noted that, “Policymakers must address building supply chain disruptions to help builders bring down construction costs and increase production to meet market demand.”
While the media often looks at these numbers and reports doom and gloom is ahead for housing, it's important to remember that there are two sides to the coin. From an economic growth standpoint, tight inventory and fewer home sales are a negative, but when looking at housing as an investment, tight inventory is supportive of home prices.
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