Why Is New Home Construction Lagging?

This is what the National Association of Home Builders said yesterday:

June 17, 2013 – Builder confidence in the market for newly-built single-family homes hit a significant milestone in June, surging eight points to a reading of 52 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. Any reading over 50 indicates that more builders view sales conditions as good than poor.

“This is the first time the HMI has been above 50 since April 2006, and surpassing this important benchmark reflects the fact that builders are seeing better market conditions as demand for new homes increases,” said NAHB Chairman Rick Judson, a home builder and developer from Charlotte, N.C. “With the low inventory of existing homes, an increasing number of buyers are gravitating toward new homes.”

The eight-point jump in the index was the biggest one-month gain since August and September of 2002, when the HMI recorded a similar increase of eight points.

“Builders are experiencing some relief in the headwinds that are holding back a more robust recovery,” said NAHB Chief Economist David Crowe. “Today’s report is consistent with our forecast for a 29 percent increase in total housing starts this year, which would mark the first time since 2007 that starts have topped the 1 million mark.”

This is what they reported today:

“The outlook for housing continues to brighten as builders respond to increased demand for new homes and rental apartments,” said NationalAssociation of Home Builders (NAHB) Chairman Rick Judson, a home builder from Charlotte, N.C. “While challenges with regard to the cost and availability of building materials, lots and labor are still keeping the pace of improvement in check, both builders and consumers are more confident about their prospects in the current marketplace.”

“Unusually wet weather across much of the country likely dampened the pace of single-family production in May,” noted NAHB Chief Economist David Crowe. “Nevertheless, the strength in permit issuance for single-family units — and stockpiling of permits for future use — provides further evidence that housing continues on a slow and steady path to recovery.”

While single-family housing starts held at a solid but virtually unchanged pace of 599,000 units in May, multifamily production bounced back from an over-correction in the previous month with a 21.6 percent gain to 315,000 units. From a regional perspective, combined starts activity was mixed in the month, posting gains of 17.8 percent in the South and 5.7percentin the West and declines of 9.0percentin the Northeast and 13.7 percent in the Midwest.

Issuance of new building permits declined 3.1 percent to a seasonally adjusted annual rate of 974,000 units in May. This reduction was due entirely to a 10.0 percent decline to 352,000 units on the multifamily side following a spike in that sector’s permits in April. Meanwhile, single-family permits edged up 1.3 percent to 622,000 units in May — their best pace in five years.  Regionally, permits rose 4.0 percent in the Northeast but declined 6.1 percent in the Midwest, 3.3 percent in the South and 3.5 percent in the West in May.

All that optimism doesn’t seem to be translating into much production. What gives?

Well the NAHB says that, yes sentiment is bullish but wet weather, increasing prices for materials, lots and labor are keeping things in check. There’s also a theory floating around that the builders aren’t in a hurry to bring a lot of new inventory to market while prices are rising so fast. I suppose there’s some truth in all of this but it still seems as if there is a disconnect here.

Take a look at this graph.

We’ve only managed to struggle back to a level of home construction that is the low point of previous recessions. Moreover, the bounce off the bottom is to say the least distinctly less robust than at any time since 1960. To add insult to injury, consider that this chart is not adjusted for population growth. They’re are a lot more potential buyers out and about now than there were 20 or 30 years ago. I know it’s been a perilously long and weak recovery but I’m less than totally convinced that something isn’t terribly amiss with the new home construction business, I just can’t figure out what it might be.

It’s not that I’ve been a bear with respect to the home builders. Given razor thin inventories and an apparent surge in demand, if one is to believe the stories of bidding wars, I thought we would see them ramping up big time by now. Nothing in the data indicates any big time ramping. I can’t refute the contention that material prices might be up but I don’t buy the labor argument. I know too many guys who have experience and would be back in the business in a heartbeat if there were jobs out there. Moreover, the recession knocked the pins from under labor rates for even skilled tradesmen like plumbers and electricians so I don’t see the cost issue there.

I can’t come up with a good reason for the paltry production of home builders and that makes me nervous. Do they see something in the housing market I’m missing? Is the ostensible boom and increase in prices a function of froth and speculation that they perceive and I along with a lot of others are missing? Are they fearful of a fragile economy tipping back into recession or at least going into stall mode? Do they have a new model predicated on maintaining very lean inventories and higher margins than in the past?  Lots of questions, no good answers. Any input is certainly welcome.

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