Housing Supply Still Lacking

The Mortgage Corner

Graph: Econoday

Most of the construction activity is in the commercial sector, at the moment, though sales of newly-constructed homes rose 3.5 percent compared to July. The pace of new-home sales in August was 12.7 percent higher than a year ago. But large revisions to prior months were all downward, a reminder that the housing recovery still can’t satisfy the demand for single-family housing, in particular.

Economists at Freddie Mac that analyzed the pace of new housing construction found that years of underbuilding has left the U.S. with a cumulative shortfall — that is, supply compared to historical averages — of 4.6 million housing units in the years since 2000. That number is especially stark considering that builders constructed a 1 million unit surplus of homes in the bubble years of the last decade.

The median selling price in August was $320,200, 1.9 percent higher than year-ago prices. Year to date, sales were 6.9 percent higher than the same period last year. The year-to-date comparison has declined over the course of the year, a sign of flagging momentum, as higher mortgage rates and home prices are discouraging some buyers and pushing up the supply of available homes to 6.1 months at the current sales rate.

Commercial construction held most of the action. “In August, the estimated seasonally adjusted annual rate of public construction spending was $316.7 billion,” said the Census Bureau, “2.0 percent (±2.8 percent) above the revised July estimate of $310.5 billion, with much of it in education, a good sign that states are spending on their public infrastructure.”

Strongest in the report was highways & streets, up 1.7 percent in the month. Educational spending was also strong with a 1.0 percent gain. Government spending was also very active in August, up 5.9 percent at the Federal level and up 1.7 percent for state & local, reported the Census Bureau.

The Fed made good on its promise to raise their overnight rate one-quarter percent to 2.25 percent, boosting the Prime Rate used in most revolving credit to 5.25 percent. This hasn’t dampened consumer enthusiasm yet, as consumer spending is rising at 3.8 percent in the latest revision to Q2 GDP growth, which held at 4.2 percent. Maybe it’s one last holiday fling before reality and higher inflation set in from the tariff wars?

Fed Chair Powell said in his announcement after the latest FOMC meeting: “I see the current path of gradually raising interest rates as the FOMC's approach to taking seriously both of these risks. While the unemployment rate is below the Committee's estimate of the longer-run natural rate, estimates of this rate are quite uncertain. The same is true of estimates of the neutral interest rate. We therefore refer to many indicators (my bold) when judging the degree of slack in the economy or the degree of accommodation in the current policy stance. We are also aware that, over time, inflation has become much less responsive to changes in resource utilization.”

It’s good to see commercial construction making a comeback, even with congress seemingly unable to pay its fair share of infrastructure spending that will be needed just to upgrade the federal highway system, as well as our energy grid that is being seriously threatened by Russian cyber attacks, according to our spy agencies.

Housing starts are attempting to catch up, as starts ran at a 1.282 million seasonally adjusted annual rate in August, the Commerce Department said Wednesday. That was 9.2 percent higher than July’s pace, and 9.4 percent higher than a year ago. But that still won’t be enough to satisfy demand.

Stephen Stanley, chief economist at Amherst Pierpont, Securities interviewed by MarketWatch’s Andria Riquier, was more blunt: “To be clear, there is fundamental softness in housing. Industry sources suggest that the relentless torrid home price appreciation in recent years has finally reached a point that numerous prospective buyers are balking. In addition, high-end homes in high-tax states are starting to see some effect from tax law changes implemented in December. On top of that, new home construction has been impacted by a run-up in materials costs this year, squeezing builders in a vice between rising costs and a diminishing appetite of prospective buyers to pay up.”

Add to that we will be soon entering the tenth year of this boom cycle, which would put it on a par with the 1991 to 2001 boom years that paid down our national debt. If only that were the case today, instead of the surging federal deficit and debt that is squeezing future public sector investments and growth.

Harlan Green © 2018

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