U.S. Markets close in 6 hrs 12 mins

Housing starts dip as multi-family construction drops, but homebuilders still up

Housing starts are a critical predictor of future homebuilder sales

Housing starts are released jointly by the Census Bureau and the Department of Housing and Urban Development. Analysts use the information to anticipate future production for home builders, future demand for raw materials, and labor costs. This data will even affect the forecasts for home-related retailers, like Lowe’s and Home Depot.

Housing starts cover the number of privately owned housing units that were started in a given period. For multi-family units, each individual unit is considered a housing start. If there’s a lot of multi-family construction happening, then housing starts can become elevated, and investors must take care not to read too much into the builders of single-family homes.

Multi-family construction drove the increase

Housing starts fell from an upward-revised 928,000 pace to 836,000. If you look closely at the numbers, it was all multi-family (more than five units) that drove the increase. Multi-family starts were 236,000 in June—a considerable drop from the 322,000 pace in May. Single-family starts dropped only slightly, from 596,000 to 591,000. Single-family starts have been much stabler than multi-family starts and have exhibited a steady rise.

Starts fell mainly in the South, from 482,000 to 424,000, but all geographic areas experienced declines.

Right now, there’s a boom for rental properties, as institutional investors chase the high single-digit rental yields that are available. This is making life more difficult for young adults, who find themselves most vulnerable in the job market, struggling with student loan debt. Rental properties are competing with the likes of Blackrock (BLK) and Blackstone (BX) for starter homes.

While 836,000 is quite a jump compared to a few years ago, relative to historical numbers, it’s quite low. From 1959 to 2002, housing starts averaged about 1.5 million units a year. In fact, housing starts typically bottomed at a million units during recessions. The fact that we only recently cracked the one million mark shows just how deep this housing recession was.

Implications for homebuilders

Today’s report had a negligible impact on the performance of the Homebuilder ETF (XHB), which was up modestly with the market. This was undoubtedly due to the fact that multi-family homes drove the increase and not single-family homes. Homebuilders compete with rentals for new household formations, and as the supply of rental properties increases, rents should fall relative to house prices. This could negatively affect new home pricing at the margin. However, that has yet to become evident in the earnings of the homebuilders, which were generally quite strong. Only NVR disappointed due to its geographical focus on the East Coast. Other homebuilders, like Lennar (LEN), KB Homes (KBH), Standard Pacific (SPF), and Toll Brothers (TOL), reported large increases in orders and backlog.

Right now, the difference between renting and buying is still extremely wide by historical standards. When you consider the difference between median house prices and median rents, purchasing is cheaper. Rock-bottom interest rates and low prices for starter homes are making homeownership very affordable. As the job market improves for younger adults, those that are currently renting will contemplate homeownership. The Obama Administration has been pushing banks to lend more and use FHA loans for first-time homebuyers. FHA loans require only 3.5% down, so they’re perfect for the first-time homebuyer. This move from renting to purchasing will help homebuilders in the long term.

More From Market Realist