January 2014 Housing Industry Update

New home construction reached the 3rd highest level in the past 66 months.  However, the latest annualized pace of 999,000 new units is insufficient to satisfy demand.  Another 50 percent increase in housing starts is needed to help relieve the inventory shortage conditions.

The latest figure is a decline from the prior month, which was the best in over 5 years.  But activity is still higher from a year ago.  Both single-family and multifamily housing starts softened in December.  Perhaps the deep freeze in a good portion of the country could have impacted builders, postponing the digging of the earth.  Housing permits, which are just paper approval and which should not have been impacted by the weather also weakened a bit.

It takes about 6 months to go from housing starts to housing completion and ready for sale for a single-family home.  Big builders can do it quicker on spec homes.  Owner-initiated construction takes more than twice as long to complete.

The inventory of newly construction homes is essentially at a 50-year low.  Much more construction is needed.  Publicly listed companies like KB Homes and Toll Brothers can tap Wall Street funds to get busy.  However, small local builders have historically been the principal supplier of new homes.  These local homebuilders rely on construction loans, which are very hard to get.  Many local lenders have indicated burdensome regulations arising from Dodd-Frank financial market regulations have hindered their ability to lend.  Hence, large companies are getting bigger at the expense of smaller guys getting shut out.

The insufficient new housing starts will mean a likely continuation of a housing shortage in 2014.  And, it is predicted that home prices and rents will continue to rise in all markets in 2014.

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