Builder Confidence Holds, But Household Formation Still Weak

The Mortgage Corner

Builder confidence in the market for newly-built single-family homes remained unchanged in April at a level of 58 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Builders remain cautiously optimistic about construction growth in 2016,” said NAHB Chief Economist Robert Dietz. “Solid job creation and low mortgage interest rates will sustain continued gains in the single-family housing market in the months ahead.”

Graph: NAHB.org

And privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,089,000. This is 8.8 percent below the revised February estimate for new construction of 1,194,000, but is 14.2 percent above the March 2015 rate of 954,000, according to the Census Bureau. This is the main reason builders’ confidence remains solid.

But for it to go higher, (and housing starts return to historical levels)—the formation of new households would also have to increase to historical levels, and that will take some time, given all those millennials aged between 18-36 years that either cannot afford to live alone, or choose to rent rather than purchase a home, according to the Census Bureau.

Graph: Bloomberg

This manifests itself in in the number of 25- to 34-year-olds of working age living at home. The rate began rising in 2003, fell briefly after the recession (perhaps because of first-time buyer-assistance programs), says Bloomberg’s Barry Ritzholtz, and then started rising again. As of last year, those still of working age still at home was at a record high.

It isn't merely living in their parents’ basements;” says Ritzholtz, “more young adults are doubling up in apartments. Census data has identified this as a fast-growing living arrangement. The central theme is that expensive housing, along with a dearth of economic opportunities, forces young adults into less-than-desirable living arrangements.”

Unfortunately, there is still a shortage of homes on the market, especially entry-level housing that most millennials can afford. Single-family housing starts in March, for instance, were at a rate of 764,000; this is 9.2 percent below the revised February figure of 841,000. The March rate for units in buildings with five units or more was 312,000.

And privately-owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,086,000. This is 7.7 percent below the revised February rate of 1,177,000, but is 4.6 percent above the March 2015 estimate of 1,038,000.

What is the current level of new household formation? Speaking on the country’s economic outlook and monetary policy at the Economic Leadership Forum in Somerset, New Jersey, Federal Reserve Bank of New York President Bill Dudley said the U.S. economy has its strengths and weaknesses—but he expects household formation to receive a boost in 2016.

“Housing starts are still well below the rate consistent with the nation’s population growth rate, and the fundamentals of housing demand remain positive,” Dudley said. “Rising employment is likely to boost the household formation rate and low mortgage interest rates should keep housing relatively affordable, despite the ongoing recovery in home prices.”

Harlan Green © 2016

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