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From Home Furnishing Business

Lack of Housing Starts Further Tightens Housing Industry

Although the U.S. now has a healthy economy, incomes are on the rise, and growth in household formations has finally started to normalize, the housing industry cannot keep up. The rebound of residential construction continues to be slow well past the recession recovery.

Due to slow-to-grow housing starts, inventory is low, mortgages and rents keep climbing, and the affordability for middle-income households continues to narrow. Labor shortages and the rising cost of land and materials has led to housing being built primarily for the higher end of the market. At a time when Millennials are fully entering their home buying years, many are being locked out – not boding well for the furniture industry. This article picks up from Statistically Speaking’s July 2018 article Housing Industry Struggles to Keep Up with Consumer Work/Lifestyle Demands.

Fewer homes are being built per household than at any time in U.S. history. According to Joint Center for Housing Studies estimates, annual construction should now be on the order of 1.5 million units, or about 260,000 higher than in 2018.

Table A shows the key economic indicators since 2011 when the recovery from the recession began in full swing. Through 2018, the furniture industry has shown consistent growth, but industry sales slowed in the first quarter of 2019 – only increasing by 1.8 percent from 2018 Q1 to 2019 Q1. Meanwhile housing starts through May of this year are showing negative growth, down 1 percent compared to last year. Household formations are increasing at a faster pace in recent years – 112,000 units higher than housing starts from 2017 to 2018 (Figure 1).

Total housing starts this year are still 31 percent below pre-Great Recession levels – 1,238,000 in 2019 May (seasonally adjusted at annual rate) versus 2006 starts of 1,801,000.

After digging out of the hole left by the recession, housing starts had jumps of 28.2 percent jump in 2012 and 18.5 percent in 2013, but the large increases have stalled in recent years before hitting negative growth in the first quarter of 2019 (Table B). 

Housing growth regionally presents a more troubling picture for some areas. As shown in Table C, the South has the healthiest growth in housing starts, up 6.5 percent this year with all other regions posting negative growth in both single and multi-family unit starts. It should be noted that the South also has the largest increases in household formations contributing to this growth. The Midwest has the largest drop in housing starts this year – down 11.2 percent.

Multi-family unit starts are up 14.3 percent in the South, while the Midwest posts a negative growth of 20.3 percent.

Between 2010 and 2015, a shift occurred in housing starts between single family and multi-family units (Table D). In 2010, the vast majority of housing starts (80.3 percent) were single family, while that number shifted to 64.3 percent in 2015. In 2015, multi-family units represented over a third of all housing starts signaling a growth in more affordable housing. Since that time, however, multi-family starts have fallen under 30 percent of total housing starts.

Regionally the ratio of single family to multi-family housing starts is strikingly different in the Northeast where multi-family housing starts represent 43.8 percent of all starts this year through May year-to-date. The Midwest has the lowest multi-family ratio at 25.6 percent (Table E).

Probably more worrisome than negative housing starts this year is the larger decline of building permits. With the exception of multi-family units up 2.9 percent, total building permits are down 2.4 percent and single-family units dropped 5.3 percent from 2018 to 2019 YTD (Table F).

While higher interest rates and rising home prices have led to a slightly increased housing inventory in recent years, inventory levels remain historically low (Table G). In this tight housing market, affordability continues to be a challenge for both renters and first-time buyers.

Low home inventories have brought correspondingly low vacancy rates. The vacancy rate among homeowners has dropped each year since 2010 to 1.4 percent this year. Meanwhile, while rental vacancies have hovered around 7 percent for the last four years (Table H).

Numerous factors have converged to create the housing shortage, one of which is lack of construction labor. The number of residential construction workers fell 21.7 percent in 2009 and did not begin showing positive growth (2.8 percent) until 2012 (Table I). While growth in construction labor has not been robust, there have been consistent increases each year since 2012 – growing an average of 5 percent each year from 2012 to 2019 May YTD. 

Weighing the positives and negatives, the furniture industry slowed in the first quarter of this year to 1.8 percent growth over 2018 Q1, definitely a negative, amidst declining housing starts and low inventories (negative) and despite increasing households, which should be a positive for the industry.  As recession soothsayers rattle swords, the U.S. economy overall keeps growing. Real gross domestic product (GDP) increased at an annual rate of 3.1 percent in the first quarter of 2019 (table 1), according to the Bureau of Economic Analysis. In the fourth quarter of 2018, real GDP increased 2.2 percent.

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