Housing starts tumbled in February. The snowy weather was the reason since the declines were much deeper in the Northeast and the Midwest regions compared to the South and the West regions where the cold weather was less of a factor. Even as the outdoor activity of actual construction fell, the indoor activity of obtaining housing permits actually increased in February. More new homes will surely reach the market as the weather improves.
Specifically, housing starts in February hit 897,000 (annualized pace) from 1.081 million in January. Housing permits rose 3 percent to 1.092 million in February. The permit increase was predominately in the multifamily units (apartments and condominiums).
The overall inventory of homes for sale is running low. The supply of existing home inventory at 4.7 months in January. For new homes, it was 5.4 months. A normal condition would be around 6 to 7 months. Therefore, there is a slight inventory shortage and more new homes need to be built.
Many locally based homebuilders have been restrained by excessive difficulty in obtaining construction loans. Many local lenders have indicated the new financial regulations as being burdensome as to the reason why construction loans are not an easy matter. The national homebuilders do not need construction loans since they obtain capital from Wall Street. In addition there has been a shortage of qualified construction workers. Larger firms are more easily able to outbid and provide a steadier flow of work hours then smaller firms. Therefore, the combined influences of construction loan difficulty and worker shortage have led to an increased market concentration in the homebuilding industry with less competition.
Despite frictions related to homebuilding, new home construction will no doubt increase in 2015. Single-family new home construction is expected to rise by around 25 percent while multifamily new home construction is expected to rise by around 10 percent. The overall housing starts are expected to reach around 1.2 million units in 2015. Unfortunately, that is grossly inadequate given the already low inventory levels and falling apartment vacancy rates. A cool 1.5 million new units are needed. Home prices and rents will likely therefore outpace people’s income growth.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.