The Mortgage Corner
Nationwide housing starts rose 13.7 percent in October to a seasonally adjusted annual rate of 1.29 million units after a slight upward revision to the September reading, according to newly released data from the U.S. HUD and the Commerce Department. This is the highest housing production reading since October 2016, when total starts hit a post-recession high of 1.33 million.
But it’s still not enough to catch up to rising household formation as more of the millennial generation’s 18-38 year-olds are forming their own living arrangements.
Higher starts are mainly because of a total of 3 Quantitative Easings by the Fed to keep interest rates are record lows since 2009; where they are today. For instance, the 30-yr conformed fixed rate is still @ 3.50 percent for one origination point, which was unheard of before the various QE bond buying programs begun under Fed Chair Ben Bernanke in December 2008, one year into the Great Recession.
There is still not enough to supply the newer generations looking for homes. I reported last week that new-home sales shot up 19 percent in September to a consensus crushing annualized rate of 667,000. This is the largest percentage gain in 28 years, folks, which accentuates the rising demand for housing.
The Census Bureau had reported that ownership increased to 63.9 percent of total households in the third quarter, the highest level since 2014. It is creeping up to the 65 percent historical ownership rate, but it remains below the 69 percent clocked at the peak of the housing bubble a decade ago.
“We are seeing solid, steady production growth that is consistent with NAHB’s forecast for continued strengthening of the single-family sector,” said NAHB Chief Economist Robert Dietz. “As the job market and overall economy continue to firm, we should see demand for housing increase as we head into 2018.”
Regionally in October, combined single- and multifamily housing production rose 42.2 percent in the Northeast, 18.4 percent in the Midwest and 17.2 percent in the South. Starts fell 3.7 percent in the West.
Why has it taken so long for the housing market to recover? ? It’s mainly due to fewer new households being formed that would require a home of their own. A 2016 San Francisco Fed study by economist Fred Furlong on household formation concluded:
“…ownership rates increased during the housing boom of the late 1990s and early 2000s, but fell after 2007. Ownership rates have been driven down by several factors including tougher credit requirements, rising foreclosures, and deteriorating household finances since the Great Recession.”
It is also true that many young adults chose alternative residential choices such as living with parents, other relatives, or friends. There is also a correlation between these living arrangements and both the rise in student debt and the decline in marriage rates.
So we know why the Fed has kept interest rates this low for almost seven years!
“But there are signs that a readjustment is imminent,” said the SF Fed. “The current population share of young adults is fairly close to the share that existed at the start of the most recent housing boom. Also, while more young people are living with their parents, they are forming their own households, albeit later in life, leading to higher headship rates over time. Mr. Furlong notes that U.S. Census Bureau projections suggest that household formations will average about 1.5 million per year through 2020, which is much better than the 900,000 annual average of the last 5 years.”
This will continue to boost housing demand, needless to say. Overall permit issuance in October was up 5.9 percent to a seasonally adjusted annual rate of 1.297 million units. Single-family permits rose 1.9 percent to 839,000 units while multifamily permits fell 9.5 percent to 458,000.
An increased supply will also help housing prices, since buying or renting a dwelling of any kind has become increasingly expensive for the younger generations.
Harlan Green © 2017
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