New home construction is desperately needed to alleviate the on-going inventory shortage in much of the country. Good news! Housing starts rose decisively in April. The growth in new home construction will further help expand employment in the construction industry.
In April, housing starts rose 20 percent from the prior month to a seasonally adjusted annualized rate of 1.14 million units. This is the strongest activity in over 7 years. Single-family starts rose 17 percent while multifamily starts increased 27 percent during the month. The longer-term trend shows multifamily activity essentially back to its historic norm, but single-family starts still need to rise by another 50 percent to get back to normal.
The Northeast region posted the biggest gain of 89 percent, but this is just a reflection delayed activity after a deeper and snowy winter. The West region notched up 39 percent. The most acute inventory shortages have been in this region so this is indeed good news. The activity in the Midwest increased 28 percent. In the South, housing starts fell by 2 percent. To the extent that the decline is likely in the Texas oil markets, it is understandable.
Housing starts have been greatly underperforming in this recovery cycle compared to the past. Even the latest figure of 1.14 million is woefully inadequate compared to about 1.5 million that is needed. Snap back recoveries were the norm. Not this time. Why? People no longer want to work outside with a hard hat? Construction loans from local banks are extremely difficult to obtain because of new bank regulations and excessive compliance rules? The end result of slow housing starts will be faster home price growth and possibility a greater wealth inequality in America.
As an aside and opining: the widening inequality and the lack of homeownership opportunity should concern us all. One may say that America was the first country to transform working-class citizens into middle-class citizens when the homeownership rate rose went from minority to majority (from 40 percent in the 1930s to 60 percent in the 1950s). The recent fall in the homeownership rate partly due to fast increases in home prices from underperformance in new home construction is therefore not the direction the country should be headed.
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.