In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses housing starts.
Housing starts reached an 894,000 annualized unit pace in October, which is the highest in over 4 years, and up 42 percent from one year ago.
Even with this huge gain, further increases are needed. The 50-year historical average is 1.5 million per year. Now that the household formation is bouncing back and reaching about a million, housing starts need to be at least 1.3 million just to keep the overall vacancy rates stable after accounting for 300,000 or so uninhabitable units that are demolished each year.
Multifamily starts made a larger gain of 57 percent compared to single-family starts, which increased 35 percent. Falling vacancy rates and solid rent gains have tipped developers to focus more heavily on new apartments.
The West region showed the biggest increase with a 73 percent gain. Inventory levels are very tight in California, Seattle, Phoenix, and Las Vegas. Naturally, homebuilders are responding to these market incentives and conditions. However, California lags well behind Texas in housing starts even though California has a larger population and is experiencing a more acute housing shortage because of tight land regulations and high fees associated with taking out housing permits. In Texas, just about anyone can dig earth by simply putting on a construction helmet. So expect a faster home price acceleration in California.
The northeast region experienced a slight downturn over the month and only an 11 percent gain from one year ago. Since Hurricane Sandy was at the very end of October, the lower starts are attributed to market forces in the region and not yet related to the storm. A large overhang of shadow inventory still looms in New Jersey, New York, and Connecticut. All three are judicial foreclosure states and hence it takes forever to turn it into an REO. Some delinquent homeowners are said to game the system by not paying mortgage but finding tenants to collect on rents.
Housing starts are likely to reach 1.1 million in 2013 and then rise to 1.4 million in 2014. That translates into a huge percentage gain of 50 percent in 2013 followed by another 25 percent gain in 2014. But such levels will still be insufficient to meet the rising housing demand. Housing shortage conditions will last for a while.
Lawrence Yun, Chief Economist
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.