The number of housing starts in June jumped to a higher-than-expected 1.21 million-unit, annualized rate following upward revisions to the May data. The revisions were mostly in the multifamily market and coming from a lower base than we saw earlier in the cycle. Multifamily starts are still running 20% below the peak hit in December 2016 despite the June increase and upward revisions to May. Overbuilding in luxury apartments in some of the largest cities has become a hurdle for new, multifamily projects; rents are starting to slacken, which is good news for debt-laden millennials starting their first jobs but bad news for all the builders with projects about to come on line. Chicago alone had roughly 8,000 new units scheduled to come online in 2017 and 2018 at the start of this year.
Single-family construction rebounded to a 849,000-unit, annualized pace after slipping below the 800,000 threshold in May. Gains in the South and the West were the most pronounced. The South represents more than half of the entire single-family market; we cannot see a full recovery in housing until starts in the South gain more traction. Single-family starts overall peaked at slightly above 1.8 million units in 2005; the South accounted for nearly half. The only region to post a slight decline last month was the Midwest; the trend for this region, however, remains on the upswing.
Permits for starts picked up faster than overall construction, suggesting that we will see more improvements in construction activity this summer. The increases we are seeing, however, are not enough to meet demand, especially in the entry-level market. A surge in land, materials and labor costs have made it nearly impossible for builders to move down the food chain like they once did to meet the demand for first-time buyers. The recent tariff on lumber from Canada is another blow to builder margins, adding about $1200 on to the average cost of building a single- family home.
Mortgage applications remained on an upward trend in the most recent week. Refinancing applications increased the most, as homeowners rushed to take advantage of what they feared may be the last of low interest rates since the Federal Reserve raised short-term rates again in June. Much of the refinancing activity is going to home buyers with lower credit scores; they were forced to pay a premium on rates and more for mortgage insurance when they bought. Refinancing could help insulate those buyers from default when the economy eventually falters.
Bottom Line: Housing demand continues to outpace housing supply, which is good news for builders. The rub is the mismatch between supply and demand in both the multifamily and single-family markets; the high-end, multifamily market is overbuilt but the supply of single-family homes is scarce, especially for first-time buyers. Historically, this would have encouraged builders to pivot to building more volume in less expensive, single-family homes. A surge in construction costs, however, is preventing that from happening. The result will show up in persistently higher prices and rapid appreciation. Bidding wars for entry-level properties in even the more distant suburbs will become more common.