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Why household formation drives homebuilder demand (Part 4)

Brent Nyitray, Sr Real Estate Analyst

Continued from Part 3

Housing starts have been depressed since the recession began

Household formation covers the demand side of the equation. We’ve seen that there’s tremendous pent-up demand for housing that will unleash as the economy recovers. What about supply?

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 homebuilders, 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 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 we must take care not to read too much into the builders of single-family homes.

From 1959 through 2002, housing starts averaged around 1.5 million units per year. This is an interesting statistic given that the U.S. population has increased so much during those years. Granted, the Baby Boomers drove some of this increase, but it’s still somewhat of a benchmark we can use to compare current starts. From 2002 through 2012, we averaged 1.3 million starts. In other words, compared to historical numbers, we’ve underbuilt for over ten years. This includes the bubble years.

During the bust years, housing starts have been well below 1 million per year. In fact, we recently popped the champagne when we broke through a 1 million pace for a single month. Prior to the Great Recession, we’d consider a 1 million print a disaster, and housing starts would rebound strongly back to normalcy, and even over-correct. Housing typically leads an economy out of a recession. This time, it hasn’t—which explains why this recovery has been so unsatisfying. In Part 5, we’ll talk about what this means for the homebuilders.

Implications for homebuilders

This analysis continues in Why household formation drives homebuilder demand (Part 5).

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