Housing Leads the Economy

Housing matters to the economy, and it matters in a big way. National Association of Home Builder (NAHB) data tell us that residential investment – new construction and remodeling – averages roughly 5% of gross domestic product (GDP) annually. To put a dollar amount to the percentage, we’re talking roughly $875 billion annually.

Housing continues to pull its economic weight. Housing starts came in strong for February, rising 5.2% month over month to 1.178 million units when annualized. Single-family starts were especially robust, rising 7.2%.

That said, at least a few commentators were down on permits, a useful gauge for estimating future activity.  Permits were down 3.1% in February. The loss, though, was concentrated on multi-family starts. Single-family starts were actually up 0.4%. Year over year, growth in single-family permits has been healthy, up 6.3%. This suggests that new-home activity should remain elevated heading into the spring season.

So the news on new-home activity is good, but it’s not great. If we had one complaint, it would be the dearth of new-home construction for the starter end of market.

NAR data show that inventory for homes priced below $250,000 dropped 8.2% in January compared to a year earlier. When supply falls, prices usually rise, such are the laws of economics. Trulia data show that starter-home buyers on average need to devote 38%, up from 32% four years ago, of income to housing costs. These first-time buyers, mostly millennials, are housing’s largest segment.

If we could make one wish for this year, it would be a ramp-up in housing starts. Even at the current level, annual starts still run roughly 300,000 below historical norms. More starts all around would be nice, but more starts geared toward the starter-home market would be even nicer.

Who knows, maybe we will get our wish. Builders remain optimistic, particularly with regards to present and future sales. The Wells Fargo/NAHB Sentiment Index posted at 65 for present sales and 61 for future sales this month. A reading above 50 is positive. Sentiment on buyer traffic, which has been weak, is finally picking up, posting at 43, four points higher than the previous month. More buyer traffic could be what’s needed to kick-start lower-priced home construction.

Mortgage activity also continues to point to elevated housing activity. Despite mortgage rates rising in recent weeks, the Mortgage Bankers Association’s unadjusted Purchase Index was up 1% for the week. It’s up 33% compared to the same year-ago period.

Recent housing data, combined with recent positive economic data and financial market activity, suggest there’s good reason for optimism heading into the spring and summer months.

Information provided by Jessica Regan.

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