The government reported on Tuesday that December housing starts fell 11.2 percent—their lowest level in two years. Despite this, many remain hopeful of a bounce back by spring. We believe that optimism should be kept in check, as high home prices remain a drag on the market.
The Commerce Department said new starts in the month slid to a seasonally adjusted annual rate of 1.08 million, well below the 1.25 million needed to support demand. This decline by U.S. homebuilders is in response to dismal sales absorption in the fourth quarter of 2018; sales in that period declined between 16 percent and 18 percent on a year-over-year basis, according to a survey from John Burns Real Estate Consulting. Many in the industry are pointing to the rise in 30-year mortgage rates to 4.94 percent as the primary culprit.
The recent softening of rates to 4.35 percent and continued dovish signals from the Federal Reserve have many hoping for a springtime revival of the market. The sentiment is supported by the U.S. homebuilder monthly sales absorptions, which improved to only a 9 percent year-over-year decline, according to the same survey, stemming some of the bleeding.
Market optimism must be tempered. Affordability remains a challenge throughout much of the United States and is driven by more than just rates. Land costs continue to be prohibitive in many areas, as does the cost of regulation, which results in one of every four dollars in residential investment going to regulation. Finally, labor costs have been rising rapidly, the result of record-low unemployment. Labor will continue to be a headwind for the housing market throughout 2019. Without addressing these primary drivers, the high price of homes will continue to make it impractical for many new home buyers to enter the market. Meanwhile, single and multi-family rentals will continue to reap the benefits.