At 8:30 this morning, the Census Bureau will release its monthly report on housing starts for March. Economists polled by Bloomberg predicted a modest drop in housing starts for March, with a median estimate of 1.16 million, slightly down from February’s seasonally adjusted rate of 1.2 million. Economists attribute the more modest March figure to higher than usual home construction activity during a milder February. As a result, the bump in new home constructions for March is not likely to be as significant. But overall, new home construction is trending upwards. Here are five key factors that are likely to influence today’s numbers.
1. A stronger economy supports a robust housing sector.
The most recent jobs report using March data shows a 5 percent unemployment rate and 215,000 new jobs, including 37,000 new construction jobs. This combined with modest wage growth of 0.3 percent bodes well for continued growth in the housing market and new home constructions. Meanwhile, low interest rates are set to continue following last month’s decision by the Federal Reserve not to raise interest rates.
“We see the continuation of the slow but steady recovery,” said Chris Thornberg, founding partner of Beacon Economics. “When you look at the underlying drivers of demand for housing, everything’s moving in the right direction. Some folks are still struggling to get past what happened in the Great Recession, but that’s the minority of people now. People are in general, financially better off, and that’s increasing demand for home ownership.”
2. Builders are confident that the single-family home sector will continue to grow.
The National Association of Homebuilders/Wells Fargo Housing Market Index tracks builder sentiment on the strength of the single-family home sector based on survey data. The April figures released yesterday indicate that builder confidence continues to be strong, holding at a rate of 58. Any rate above 50 indicates strong confidence in the housing sector, a level that has held steady fro the past three months.
“The single-family housing sector continues to recover at a slow but consistent pace,” said National Association of Home Builders Chief Economist Robert Dietz in a press release concerning the Market Index report.
Economists add that the growth of single-family home construction is partly driven by the entry of millennials into the workforce. This is supported by data from the National Association of Realtors, which reports an increase in the number of millennials embarking on suburban single-family home purchases. The National Association of Homebuilders predicts that single-family home constructions will outstrip multi-family developments this year.
WHAT’S PREVENTING THE HOUSING SECTOR FROM RETURNING TO PRE-RECESSION LEVELS
Housing starts still haven’t rebounded to pre-recession levels. At the peak of the boom in January 2006, new home constructions mushroomed at a seasonally-adjusted rate of 2.3 million. Here are a couple of reasons why the sector hasn’t fully recovered.
3. The construction industry is having trouble filling an increasing number of job openings.
The Bureau of Labor Statistics reported a steady increase in the number of job openings in the construction sector over the past six months, with a seasonally-adjusted rate of 193,000 new openings for February, up from 157,000 in January. At the same time, the number of separations, which includes quits and layoffs remained steady at the 300,000 range.
“Workers are harder to attract in some markets,” said Dietz. “When builders are citing access to labor as a challenge, it’s not only for the building companies but for the subcontractors and other elements vertically down the production channel.”
Attracting workers back to the construction industry after the Great Recession is an ongoing challenge for the industry.
4. Some homebuyers are nervous still about buying, citing concern over economic conditions.
The April Fannie Mae Home Purchase Sentiment Index, which tracks consumers’ expectations of the housing market, reported the lowest reading in 18 months. Despite strong employment numbers, the survey revealed that concerns over the direction of the economy might be prompting would-be homebuyers to hold back on new purchases.
“Growing pessimism over the last three months about the direction of the economy seems to be spilling over into home purchase sentiment,” wrote Doug Duncan, senior vice-president and chief economist at Fannie Mae. “The gap between the share of consumers who think the economy is on the wrong track and the share who think it is on the right track has widened.”
Concern over the economic meltdown in China and falling oil prices may be influencing survey results, Fannie Mae reported.
5. Access to land is a challenge in some jurisdictions.
Increasing regulatory challenges are impeding access to land for home construction, say housing economists. This is particularly true in markets where land development rules and environmental compliance codes complicate land acquisitions.
“In terms of cost considerations, one of the factors is changing regulatory burdens in terms of environmental rules and the Endangered Species Act,” said Dietz. “There’s a layer of costs in terms of what’s required to do land development.”
Others add that restrictive zoning on both coasts aims to restrict the pace of development.
“They have convinced government to impose strict zoning and environmental regulations to limit the supply of housing that have the same effect as Trump’s would be wall,” wrote Baruch College economist David Shulman in his blog. “Simply put the regulations work to keep people out.”