The Mortgage Corner
The residential housing market is still starving—of supply, that is. Not enough homes are being built to meet the surging demand of new households from both millennials and immigrants.
This is when construction starts fell 3.7 percent in April to a lower-than-expected 1.287 million annualized rate while permits fell 1.8 percent to an as-expected 1.352 million rate. The decline for both starts and permits reflects fewer multi-units which fell sharply in April after rising sharply in March.
But single-family starts showed an increase to an 894,000 annual rate while single-family permits, which are the best news in the report, rose 0.9 percent to an 859,000 rate. But not all the single-family news is positive as completions fell 4.0 percent in the month to an 820,000 rate for a decline that is not welcome in a housing market starved of supply.
Meanwhile, the Conference Board’s Index of Leading Economic Indicators increased 3.3 percent in the six-month period ending April 2018, which is just ok. The leading economic index that attempts to predict future growth trends has been increasing for the past 2 years, but not enough to show higher than 2 percent plus GDP growth, though GDP 12-month growth accelerated to 2.9 percent in Q1 2018 from a barely positive Q1 2017 GDP. That is why the graph shows longer term average growth barely above 2 percent.
“April’s increase and continued uptrend in the U.S. LEI suggest solid growth should continue in the second half of 2018. However, the LEI’s six-month growth rate has recently moderated somewhat, suggesting growth is unlikely to strongly accelerate,” said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board.
Housing will continue to expand with growing demand from newly formed households. The homeownership rates of young adults aged less than 35 and 35-44 increased over the last year, said the National Association of Home Builders in January.
The homeownership rates of millennials, mostly the first-time homebuyers, registered the largest gains among all age groups, from 34.7 percent to 36 percent. It suggests that millennials are gradually returning to the housing market. Households ages 35-44 experienced a modest 0.2 percent increase from 58.7 percent to 58.9 percent. But the 65-and-older crowd lead the pack with a 79 percent homeownership rate.
According to the Census Bureau’s Housing Vacancy Survey (HVS). the number of households increased to 120.2 million in the fourth quarter of 2017, 1.4 million higher than a year ago. The gains are largely due to strong home owner household formation. Indeed, the number of homeowner households has been rising since the third quarter 2016, while the number of renter households has been on the downward trend. In 2017, the number of homeowners increased by 1.5 million, while the number of renter households declined by 76,000.
Can the housing supply ever catch up with new demand? Interest rates are rising, but are not yet even close to historical levels at this late stage of an economic recovery. The 30-year conforming fixed rate is still just 4.25 percent for a 1 pt. origination fee, and the 10-year Treasury bond yield is still hovering around 3 percent—all post WWII historical lows.
We therefore see a strong housing market will continue and new construction remain robust for the rest of this year; as long as there are buyers who can afford the rising housing costs!
Harlan Green © 2018
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