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Housing Starts Flexes Single-Family Muscle

Boom! Housing starts had an epic beat Tuesday, which usually means the data will get revised lower at some point, but one thing is for sure: the housing starts and new home sales sector came to throw shade at the 2023 recession crowd.

Many say housing leads the economy into a recession, which has been the case for decades since higher rates tend to put the U.S. economy into a recession. However, the housing market dynamics changed on Nov. 9, 2022, positively impacting new home sales. This has confused a lot of Wall Street types! I recently did a podcast with Downtown Josh Brown that was more catered for investors to try to explain the madness of the housing market in 2023.

On to the report!

From Census: Housing Starts Privately‐owned housing starts in November were at a seasonally adjusted annual rate of 1,560,000. This is 14.8 percent (±14.0 percent) above the revised October estimate of 1,359,000 and is 9.3 percent (±14.6 percent)* above the November 2022 rate of 1,427,000.

Housing starts are being boosted by single-family growth as the apartment boom has ended, so as long as new home sales can grow, this data line will be stable. This was an abnormally strong print, so I see some revisions coming later, but it will still be a favorable report.

From Census: Building Permits: Privately‐owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 1,460,000. This is 2.5 percent below the revised October rate of 1,498,000, but is 4.1 percent above the November 2022 rate of 1,402,000.

Housing permits declined, as the 5-unit construction boom ended, negatively impacting the permit data. If we had growth in 5-unit construction, the permit data would look very different. However, the mega-bull run we had in 5-unit construction post-COVID-19 is coming to an end. Those 5-unit permits have been falling for months as the math doesn’t make sense anymore to build apartments with rates so high.

However, housing permits for single-family homes have been growing for some time; this is a positive as the builders will hold on to their labor for longer. This is something that the recession crowd of 2022 and 2023 hoped wouldn’t happen.

Of course, it isn’t all good news in housing construction; the apartment boom is over. When borrowing costs get too high, building doesn’t make sense. Today, the Federal Reserve has made the cost of capital production too high, so I expect many apartment units that were in the works won’t be finished as the Fed has stayed too restrictive for too long.

The publicly traded homebuilders have excess profit margins to buy down mortgage rates when selling new homes. Not all homebuilders have this advantage, so the builder confidence index took a hit when rates got to 8%. Now that rates are almost down 1.50%, this index will pick up as lower rates can create more new home sales with less money spent to buy down rates. Some of the negative responses to this survey have recently come from smaller builders.

Overall, the housing starts data is a plus as the single-family story continues, which is a positive story for the U.S. economy. However, we can all see the pain in the 5-unit construction area, which can impact employment in that sector as housing permits continue to fall.

However, single-family starts can still grow as new home sales grow, meaning more single-family housing. This isn’t the case for the apartment sector, where many projects are also being canceled.

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