Thursday, July 22, 2021
In data we received on Tuesday, July 20, U.S. Housing Starts increased 6.3% in June to 1.64 million units, a 3-month high. By region, housing starts rose in the South and West, and in the Northeast, single-family home construction soared more than 34% from the prior month. The data suggested residential construction continued its sharp post-COVID rebound despite the difficulties builders are having in finding labor and materials.
As seen in the LPL chart of the day, Housing Starts are now hovering in the same territory as the highs reached prior to the Great Recession; an economic instance spurred by excess housing activity and high home prices. While recent housing activity has been decidedly robust, efforts to ramp up supply have still not offset demand. The chart illustrates that the Months’ Supply of Home inventory continues to dwindle (only 2.5 months of inventory as of May). This has kept upward pressure on housing prices and reduced housing affordability.
“U.S. residential construction activity continues to be robust, but builders, faced with labor shortages and high materials costs, can’t seem to catch up with demand. The supply of home inventory continues to shrink suggesting today’s U.S. housing market may be even tighter than prior to the Great Recession,” explained LPL Financial Director of Research Marc Zabicki.
We believe the tight supply condition is not expected to dissipate anytime soon. Why? A key reason is that home building activity may be showing signs of slowing. Building Permits, a proxy for future housing construction (also released on Tuesday), fell 5.1% in June which followed a 2.9% drop in May. That’s the lowest permit activity since October 2020 and it suggests a more moderate pace of homebuilding in coming months. High materials costs and shortages of land and labor are stifling efforts to ramp up supply to meet demand.
Should current conditions persist, we believe high housing prices could begin to negatively impact consumer spending and become a net drag on economic growth in the coming quarters. We believe high prices may lead to higher mortgage payments and higher rental cost. According to the S&P CoreLogic Case Shiller Home Price Index, house prices rose 14.9% year-over-year in April (the latest data available). This same index has risen by double-digit percentages since December, a pace that is likely not sustainable for long.
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