The Opportunity in Homeownership

With 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.

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.

In this article, we’ll analyze the Housing Starts and Building Permits figures for March and April’s builder sentiment data that was just released, and what they may mean for the opportunity in homeownership.

Housing Starts Slide in March

Builders pulled back on new construction last month, with Housing Starts falling nearly 15% from February. Starts for single-family homes, which make up the bulk of homebuilding and are the most crucial due to buyer demand, were also down 12.4%. There was a similar trend in future construction, with Building Permits moving lower despite much needed supply.

The NAHB noted that higher than expected interest rates, hotter than anticipated inflation, and higher supply side costs all contributed to the construction slowdown last month. Danushka Nanayakkara-Skillington, NAHB’s Assistant VP for Forecasting and Analysis, added that single-family construction will also likely decline in April, given the drop in building permits last month.

Home Builder Sentiment Holds Steady

Builder confidence held steady at 51 in April, and while this broke a four-month streak of gains, the index remains in expansion territory just above the key breakeven level of 50. Any score over 50 on this index, which runs from 0 to 100, signals that more builders view conditions as good than poor.

Looking at the components of the index, current and future sales expectations both remain in expansion territory at 57 and 60, respectively, though future expectations have softened as some buyers remain on the fence. The gauge judging buyer traffic moved higher to 35, but it’s still in contraction territory.

NAHB’s Chief Economist, Robert Dietz, explained, “April’s flat reading suggests potential for demand growth is there, but buyers are hesitating until they can better gauge where interest rates are headed.”

So, what does all this data mean?

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 available homes for sale are a challenge, but when looking at housing as an investment, tight inventory is supportive of home prices.

In fact, when looking back at the data, there’s a reason to have confidence in housing as an investment. The chart below shows how purchasing a home and holding it for 10 years has resulted in a profit every year since 1942 except one, when there was a very small loss for buyers in 2006.

Plus, home values continue to appreciate. Case-Shiller recently reported that home prices rose 5.5% last year, with national home values 46% higher since 2019! And prices are forecasted to rise this year due to ongoing high demand and tight supply, especially as many homeowners with low-rate mortgages are still choosing to stay put.

Being able to articulate the opportunity that exists in homeownership is more important than ever, especially in the face of media misinformation, so you can help your clients see how homeownership is a strategic move for their financial future.

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