Single-Family Housing Growth Is Good News for GDP

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We got some housing data this week that maybe looked a little bit contrary to our expectations. I'm here with Bob Johnson, he is our director of economic analysis, for his take.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, Bob, we've talked about for 2016 we expect new home starts and sales to look pretty strong while existing home sales maybe to be weaker. But we got at least some headline data that looked opposite of that this week.

Johnson: Absolutely correct. I think we started out with weak data on the starts and permits front, with both those numbers down sequentially and down sequentially quite a bit, the starts and the permits. And I think that initially worried some folks. But then people kind of started to look back at the data, and you know there's a lot of seasonal adjustments in these numbers and they tend to be affected by weather a little bit. So, the analysis becomes very complicated.

Now, if you look at the starts data, for example, it had a very strong month in single-family in the prior month and then this month was kind of a little bit of payback. So, that's a little bit of what's going on there. But if you kind of roll the data and look at 12 months' of starts, we're kind of at a 12%, 13% type of year growth rate, which I think is a very healthy level and very indicative of where kind of the home--building a new one from scratch--of where we're probably at.

On the other hand, we expected existing homes to be weak and instead we kind of had a 5% monthly pop in existing homes back to 5.33 million, considerably above expectations. But again, there you look at the data year-over-year and we're only up about 1% or 2%. And that's more in line with what we expect. For the full year, we're thinking existing homes will be up 3% to 5%, slower than in 2015 and the new home market will be up something on the order of 10% or so, up from 8% the prior year, and the mix is shifting in a favorable way as well.

Glaser: Another example of a headline number maybe being somewhat misleading--let's look at the differences between multifamily starts and single-family homes. That's something you watch closely. What did that look like in the month? Are we seeing a shift away from apartments and to single-family homes again?

Johnson: Absolutely. It is going to take a while to work through the whole system because obviously when rents were so high, people got very enthused and a lot of apartments were started, but those take a considerable amount of time to finish. So, one of the interesting things out of the starts and permits report was that homes that were under construction remained at a remarkably high level, kind of the highest of the recovery and looked particularly strong. However, new homes starting down that pipeline are showing hardly any growth at all. In fact, there were some declines in the month-to-month data in terms of multifamily homes and even year-over-year the number isn't looking like much growth at all. Meanwhile, starts and permits are up like 24% and 18% year-over-year on the single-family basis. Again, you still have to be careful about using a single month's worth of data, but still the growth is coming almost entirely out of the single-family market, which is in direct contrast with what we saw a couple of years ago where all the growth was coming out of the apartment side of the house.

Glaser: And that's good news for GDP?

Johnson: That is really great news for GDP because it takes more labor, and the units tend to be higher-priced in that market and so it has a bigger economic impact than an apartment building might have. The impact is really rather--the difference is quite considerable. So, as we see the single-family market begin to heat up, which many people had kind of written off for dead, is really kind of what's moving the needle right now and that's just absolutely great news for economic activity and GDP when so many other categories of GDP aren't looking so hot right now.

Glaser: What's sending buyers to new homes? Are builders kind of building the homes people want? Is it inventory? Is it pricing? What's driving this excitement?

Johnson: Absolutely. Let's take them one by one. On inventory, inventories of existing homes were actually down year-over-year in this report. New home data, which we won't have the full inventory status until another week, but it had been trending up in the low-double digits for a few months now, so there is more availability there, and there is some indication from the price data that the builders are building more affordable homes. So, that's helping the market along as well. So, I think there are a number of factors working in favor of those new homes right now.

Glaser: So, overall, you really see your thesis on how housing is going to play out still very much intact?

Johnson: Absolutely. And I think that continuing on with the demographics that we like to talk about so much, we went through a period where there was quite a boom in 22- to 30-year-olds as kind of the key market for apartments, and that group expanded rapidly. And now, I think we're going to move into a mode where that's starting to shrink back a little bit. And I think the builders, because they saw a lot of demand and the possibility of dramatically raising rents, all flocked to that market in terms of building and now I think we're seeing some of those high-end apartments starting to stall out a little bit and I think that now the interest is going to shift back the other direction a little bit, which is in my mind great news for the economy. And by the way, that trend--that is one trend we saw across both existing and the new home market and that was that interest at the higher end seems to be fading a bit--that the stock market and all the uncertainty that we've seen in the beginning of 2016 didn't make much difference to most of the market. But the high end of the market was notably slower in both those categories.

Glaser: Bob, thanks for your analysis today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.