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The Census Bureau released its monthly construction data this morning, and the news is pretty positive -- at least on its face. According to the data, housing starts were up 6% last month, reaching their highest level in over 14 years. The jump was driven wholly by single-family starts, which saw a whopping 12% increase over November.
At first blush, it seems like great news -- especially given the ever-dwindling supply of for-sale houses. Though inventory has increased slightly since bottoming out a few months ago, the shortage is very much still a problem -- and a boon in construction? That could be just what the market needs to tamp down price growth and expand supply.
Unfortunately, one positive headline doesn't make a trend. And according to experts -- not to mention other data released this week -- it seems the recent uptick may not be the saving grace many are hoping for.
Here's what you need to know:
1. There are lots of builder-side concerns.
According to the National Association of Home Builders, builder confidence is waning. The organization's recent Housing Market Index shows that overall confidence in the market dropped three points this month, largely due to rising lumber prices and surging cases of coronavirus.
There are also concerns around potential regulatory upheaval, especially with a new administration now in the White House.
"Builders are grappling with supply-side constraints related to lumber and other material costs, a lack of affordable lots, and labor shortages that delay delivery times and put upward pressure on home prices," said NAHB Chairman Chuck Fowke. "They are also concerned about a changing regulatory environment."
With that said, builders are still confident. The current HMI index is at 83, down from the month prior but still well above 50 -- the turning point for good vs. poor market conditions. The question will be whether these supply-side concerns will pick away at that confidence even more as 2021 goes on.
2. It takes a while for starts to become inventory.
Increasing housing starts won't immediately alleviate an inventory problem or satisfy demand -- even if they continue rising.
The latest Census data shows that it takes around seven months for a housing start to become a completed property. That puts these starts at completion around August -- well into the hot summer buying market. Given the additional demand expected at that time of year, an increase in inventory may not be as effective as it would be in a slower season.
A silver lining here is that it's likely vaccines will be more widely spread by that point. When that happens, more sellers may be willing to list their homes and enter the open market, potentially adding even more inventory list. That's all a big "if," though.
3. Many of the starts were due to backlog.
New homes were popular during the pandemic. According to the Mortgage Bankers Association, new home purchase applications were up a whopping 42% in December. In November? It was nearly 35%.
As Doug Duncan, chief economist at Fannie Mae, put it, "Tight inventories of existing homes for sale, coupled with low mortgage rates and a shift of some buyers toward suburban locations, drove a surge in new home sales last year."
As a result of this surging demand, many homebuilders were backlogged. They sold off their already-built properties and signed contracts on homes not yet in the pipeline. This created a backlog of projects for when labor freed up or adverse weather conditions weren't a concern.
According to Danushka Nanayakkara-Skillington, assistant vice president for forecasting and analysis for NAHB, the recent uptick in starts reflects this buildup "as builders worked off some backlog."
4. Experts aren't so optimistic.
If you ask the experts, most will tell you construction has a long way to go if it's going to alleviate the market's supply problem.
According to Duncan, construction "needs to continue to catch up in order to bring the sales/inventory relationship back into balance." He added that "the previously reported 11% decline in new home sales in November, combined with ongoing builder constraints, suggests to us that single-family starts will decelerate in coming months."
Nanayakkara-Skillington agreed, saying NAHB "expects some softening" in the coming months.
The bottom line
Of course, only time will tell what headwinds builders will face down the line and how those will impact housing inventory across 2021. One thing's for certain, though: Today's numbers offer at least a glimmer of hope -- for both buyers and investors alike.
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