Takeaway: The Headline modestly overstates the magnitude of gain but SF activity is improving, confirming yesterday's rise in Builder Confidence.

Starts | Fresh Highs  - Compendium 091819

Today's Focus: August Starts & Permits

We spent yesterday extolling the virtues of divergent base effect dynamics between housing and the preponderance of domestic cyclical indicators – a condition set which has served to cultivate “Comp-fidence”  among builders and engender some organic mojo in purchase activity among buyers.  

As it relates to New Construction activity and Sales specifically, the broader backdrop remains the following: 

  • New Construction activity remains depressed on a historical basis with resi investment as a % of GDP still just above cycle trough levels observed historically despite 7 years of recovery.
  • Supply conditions in the Existing Market remain a constraining factor to any sustainable acceleration in volume growth.  Lack of existing market supply is, on the margin, a relative positive for New Construction demand.
  • Price Spreads:  As the recovery has matured, credit availability has improved and broadened builders have shifted new supply towards the entry level market.  As median/avg new construction square footage has moderated alongside this focus shift from builders so to has the median price spread between new and existing homes which has been making lower cycle lows in recent months. 

We also spent one bullet yesterday extolling the virtues of asterisk’s … specifically, that the September HMI survey data (and the forthcoming August fundamental data) doesn’t capture the latest, expedited backup in rates and the increase in builder confidence in September was singularly a function of a rise in the Current Sales component with Current Traffic unchanged and 6M Expectations falling – a dynamic which, it could be argued, largely represents a full-forward effect as fence-sitters engaged alongside a prospective trough in rates.  The only other cautionary caveat we’d offer this morning is that our early outlook is for the U.S. economy to tread into Quad 2/Quad 3 into year-end, an environment which has, historically, been poor for housing related performance (causal factor = rates ↑)

Now, just to close the loop and complete the elusive extollment trifecta, we’ll conclude by re-extoling the positive benefits highlighted at the outset as they are likely to define the immediate-term reality for the sector. 

At present, the rate tailwind and labor market resilience continues to manifest in the reported demand data. Indeed, Purchase App volume in the latest week (reported this morning) showed Purchase activity ’s up +5% W/W while tracking +10% Y/Y thus far in September … good for the strongest pace of growth in 3 years.  As can be seen in the 1st chart below, current levels of activity (or even marginal deterioration) would equate to strong RoC data as we move through year-end given the comp setup.  That mid-high single digit growth will be occurring against a backdrop of broadly negative earnings growth in 3Q and with most industrial-mfg indicators mired in outright contraction. 

 The Data: 

  • Starts:  Total Starts increased to 1.36MN against upwardly revised July estimates, rising +12.3% M/M while accelerating to +6.6% Y/Y, marking the strongest level of activity of the cycle and the fastest pace of growth in a year.   The upside was driven primarily by the +33% M/M/+14% Y/Y increase in MF activity while SF Starts rose +4.4% sequentially, re-breaching the 900K level to the upside to print an 8-month high at 919K.
  • Permits: The internal dynamics were similar across Permits with a fresh high in Total Permit activity driven by an outsized gain in MF permits and more modest increase in SF.  Single-family permits were +4.5% M/M and +4.5% Y/Y = first month of positive Y/Y growth in a year and fastest pace of growth since July 2018.
  • Conclusion: The Headline overstates the magnitude of gain as much of it the upside stemmed from multi-family but the improvement in SF activity was solid and the trend in SF Permits suggests continued solidity nearer-term.   

Starts | Fresh Highs  - Purchase Apps YoY

Starts | Fresh Highs  - SF Starts

Starts | Fresh Highs  - SF Starts YoY

Starts | Fresh Highs  - Starts cycle

About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 

Joshua Steiner, CFA

Christian B. Drake