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Housing starts with a V

| August 21, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

The US has found the Covid pandemic difficult to beat as the summer surge has led to a renewed round of limited lockdowns in many parts of the country. This has dashed hopes for a quick rebound for sectors of the economy directly affected by the virus such as restaurants, travel and personal services. However, there are parts of the economy that have snapped back since economies began to reopen. The housing industry is enjoying perhaps the quickest rebound of any major sector of the economy.

Housing Demand

Housing demand held up much better during the lockdowns than expected and has rebounded violently since then. New home sales only dropped by 20% from February’s reading to the bottom in April. Since then, sales have jumped, reaching 776,000 in June, the strongest monthly reading since 2007.

Exhibit 1: V-shaped new home sales

Source: Census Bureau.

Meanwhile, existing home sales, which are recorded at contract closing, have lagged by a month or two, as is typical. The series bottomed in May, down 32% from a February reading, but snapped back by around 20% in June and by 25% in July, surging to the highest level since 2006. Pending home sales, which tend to lead existing home sales by a month or two, surged in May and then surged again in June to the highest level since early 2006.

The spurt in demand reflects a variety of factors. Certainly, low mortgage rates did not hurt, but the virus may actually have been a major impetus, as dense urban apartment buildings suddenly seemed less desirable than a house with extra rooms for home offices and enough space to properly social distance.

Housing supply

In many though certainly not all, states, residential construction was prohibited during the lockdowns. As a result, homebuilding activity came to a standstill in parts of the country. Even here, however, the downturn was less than initially feared. Total housing starts sank by 40% in March and April—by 35% for single-family starts—from a weather-boosted February reading. Home building rebounded slowly in May, rising by “only” 11%, when lockdowns were being gradually lifted in most states. However, momentum picked up further in June, up 18%, and July, up 23%. The July level was less than 5% short of the February reading and more than 15% higher than the 2019 pace.

Exhibit 2: V-shaped housing starts

Source: Census Bureau.

However, while builders have started more homes over the past few months, overall residential construction remains depressed and in catch-up mode. The Census Bureau’s measure of construction spending fell in each month from March through June. That should change going forward, beginning with the July figures due out at the beginning of September.

GDP Implications

Residential construction contracted at a 38.3% annualized pace in Q2, subtracting about 1.5 percentage points from overall growth. Residential construction should rebound by 40% in Q3, which would reverse about 70% of the Q2 decline in dollar terms. The housing sector consequently could add close to 1.5 percentage points to GDP growth in the current quarter.

Not done yet

Housing supply has fallen well behind demand. For example, new home inventories dropped to 4.7 months’ supply in June, the lowest reading in nearly three years and well short of the six months of supply that has traditionally been associated with a balanced market. It is no wonder that the NAHB Home Builders Sentiment Index surged to match an all-time record high in August. Builders are licking their chops, knowing that demand will likely be robust for the time being, and they will be busy trying to make up for lost time at least for the balance of 2020.

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