Housing starts dropped to a 1.1 million-unit, annualized rate in response to a return of harsh winter weather in January. The weakness was concentrated in the single-family home market, which is most susceptible to weather shifts. Storm Jonah, in particular, battered the Eastern seaboard during the month, shutting down businesses and delaying construction in some of the most populated areas along the East Coast, including New York and Washington, D.C. The storms affected single-family starts in all regions but the West, which was spared from the worst. The multifamily market continued to expand, although some markets look like they may be overbuilt, especially at the luxury end of the market.
Zillow is expecting a significant slowdown in apartment rents across the nation in 2016, with declines in some key markets. Chicago is flagged as a market that may even see a decline in rents by year-end. That could put a damper on multifamily construction later in the year or as we move into 2017. As rent prices soften, I wouldn’t be surprised to see some of the apartments being built in Chicago, in particular, converted into condominiums before they actually hit the market. [The conversion from unrented apartments to condos is a relatively easy process in Chicago.]
The persistent weakness in single-family starts raises some larger concerns for the economy in general. Inventories of both new and existing homes remain extremely tight, especially for first-time buyers; that is fueling bidding wars and undermining affordability. Builders would prefer to build more first-time buyer homes for the single-family market but face structural hurdles to doing so. Their margins have narrowed significantly since the onset of the crisis, which is an incentive to stay in the more expensive, trade-up market. Changes in zoning laws and a shortage of less expensive immigrant labor are also inhibiting the ability of builders to develop more affordable properties. The only silver lining is the drop in prices at the gas pump, which is allowing people who once consideredonly the urban core to broaden their searches to less expensive suburban markets.
Bottom Line: The housing market, which got us into this mess in the first place, is facing significant hurdles. Supplies in the single-family market, in particular, remain constrained relative to demand. Mortgage applications have actually surged since the start of the year. The result is showing up in housing appreciation, which is great news for existing home owners who want to see the offset of rising home values to falling stock prices. It is bad news, however, for affordability and the next generation of first-time buyers trying to get into the market. It is also a problem for the broader economy in that single-family construction accounts for a disproportionate amount of better-paid jobs.
Separately, rising housing appreciation shows up in the owner’s equivalent rent component of the personal consumption expenditures (PCE) index. The problem, so far, has been that other prices in the economy have moderated as more money is being allocated to shelter costs. This is not the kind of trade-off in inflation that the Federal Reserve is seeking. Fed officials would like to see a more broad-based reflation of prices.