Housing Headwinds

While June's homebuilder sentiment survey (released yesterday) was just fine with an overall score of 68 (above 50 denotes optimism), last month's housing starts and permits results (released this morning) were anything but!

Housing starts that were expected to hit around 1.32 million in June came in at an alarmingly lower 1.17. As for new building permits, economists forecast 1.33 million, yet June delivered a disappointing 1.27.

So what gives? If home builders are so optimistic, and the economy's as good as Fed Chair Powell is telling Congress this week, and as strong as our macro index is scoring, why the poor showing in these key housing metrics? 

Well, first of all, while, as you'll see below, there are factors that legitimately point to issues other than waning demand, these are the kinds of results we have to take seriously as we assess economic conditions going forward. It will no doubt negatively impact the consumer component of our economic subindex when we score our model next week. 

Anyways, and again, there's stuff hitting housing that has nothing to do with a potentially weakening economy, in fact, one factor -- lack of labor (and rising wage costs) -- says quite the opposite.

Consider the environment around trade (tariffs on lumber from Canada, and steel from all over the place, for example) and labor (the importance of immigrant labor to the construction business) as you take in the following excerpts from Reuters commentary this morning:

"Higher lumber prices and shortages of land and labor are constraining homebuilding. The housing market is lagging overall economic growth, which appears to have accelerated in the second quarter after hitting a soft patch at the start of the year.

“We’re seeing pressure on both sides of the market, from increasingly expensive inputs on the supply side to prices that are charging ahead of wage growth on the demand side, and the result is that neither builders nor buyers can keep up,” said John Pataky, chief consumer and commercial banking executive at TIAA Bank in Jacksonville, Florida."

"A survey on Tuesday showed confidence among single-family homebuilders unchanged in July, with builders continuing to be “burdened by rising construction material costs.”"

"The Trump administration in April 2017 imposed anti-subsidy duties on imports of Canadian softwood lumber, which builders say have boosted the price of a new single-family home."

All that said, there was one small positive below the surface: The numbers reported include multi-family (rental) activity; in terms of single-family results (mostly folks buying homes to live in) by themselves, while starts were down 9%, permits were up an albeit modest .8%; which suggests that we'll soon see a slight rebound in starts.