The Builders Confidence Index came out yesterday and it has been all smiles lately, as builders believe they can sell more homes. Historically, the key level of builders’ confidence is 50: anything below 50 is bearish and anything above 50 is expansion. As you can see below, we broke above 50 yesterday as the index moved to 55.
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Tuesday’s massive housing starts print will be revised down but homebuilders from November 2022, new home sales and builders’ confidence remain intact.
Let’s look at the housing starts data and make sense of it all.
From the Census: housing starts: Privately owned housing starts in May were at a seasonally adjusted annual rate of 1,631,000. This is up 21.7 percent (± 14.8 percent) from the revised April estimate of 1,340,000 and up 5.7 percent (± 10.8 percent)* from the May 2022 rate of 1,543,000. Single-family housing starts opened at a rate of 997,000 in May; This is up 18.5 percent (± 14.1 percent) from the revised April figure of 841,000. The May rate for units in buildings of five units or more was 624,000.
This was the month-to-month print on Housing Starts. It is likely to be less revised as has always been the case with really large housing start print – both positive and negative. It was such a shocking print that some forecasters called for a recession on their way out by 2024 because housing is traditionally a leading economic indicator.
Housing Completion: Privately owned housing completions in May were at a seasonally adjusted annual rate of 1,518,000. This is up 9.5 percent (±12.3 percent)* from the revised April estimate of 1,386,000 and up 5.0 percent (±13.0 percent)* from the May 2022 rate of 1,446,000. Single-family home completions were at a rate of 1,009,000 in May; This is 3.9 percent (±13.9 percent)* higher than the revised April rate of 971,000. The May rate for units in buildings of five units or more was 493,000.
The housing completion data is still the saddest housing data line we have, but it also shows how different the housing market is now than it was in 2008 when the housing crash occurred. Housing completions are long and still need to be bullish: As you can see in the chart below, we’ve been nowhere for a while.
Unlike the housing bubble years when starts, permits and closings were up and down, this time the delays caused by the COVID-19 delay are evident. However, we are in pre-COVID-19 times, and this data line is still slower than my tortoise Grundy.
building permits: Privately owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 1,491,000. This is 5.2 percent higher than the revised April rate of 1,417,000, but 12.7 percent lower than the May 2022 rate of 1,708,000. Single-family authorizations were at a rate of 897,000 in May; This is up 4.8 percent from the revised April figure of 856,000. Authorizations of units in buildings of five units or more were at a rate of 542,000 in May.
The missing link to ending the housing recession is housing permits. Traditionally in all expansions, housing permits are rising wildly when builders’ confidence is barely bouncing off bottom. Perms haven’t gotten there yet, and for a good reason. First, as you can see below, housing permits have certainly stabilized, but haven’t started to pick up yet.
I have a straightforward model of when homebuilders will start issuing new permits with a few kicks. My rule of thumb for estimating builder behavior is based on a three month supply average. Not related to the existing home sales market – this monthly supply data applies only to the new home sales market and the existing home sales market 7.6 months There are too many for builders to issue new permits with any kick and duration.
- when supplies 4.3 months And underneath, it’s an excellent market for builders.
- when supplies 4.4-6.4 months, It’s just a fine market for builders. They will build as long as sales of new homes are increasing.
- when supplies 6.5 months And above, builders would pull back on construction.
As you can see below, builders have made good progress in reducing the monthly supply, but they are yet to push for permits, as they are still working on their backlog. The construction of some of those houses has not even started yet.
Many people use housing as a leading indicator of when the US will go in and out of a recession. As you can imagine, with builders’ confidence rising so much and now housing starts with a huge print, some people are starting to question their recessionary call for 2023.
For me, it’s all about increased permits and demand, and we’re working our way back to normal for the sector, we’re just not there yet. Can you imagine the housing market with mortgage rates at 5% instead of 7%? A lot of the housing data will be even stronger with lower mortgage rates.
There are some significant advantages to selling your homes to builders because they sell them as a commodity and don’t have to deal with some of the issues that a traditional home seller has to deal with. In a higher mortgage rate environment, they can offer lower rates and drive away some buyers who would normally go to the current home sales market.
Overall, this was a shocking report on the headline. However, when you dig a little deeper, it shows that the positive housing trend that started in November of 2022 is continuing, but more work needs to be done.
