Wednesday’s Census Bureau report on new residential construction data for September sends a mixed message to the housing market. Current home buyers received a lift as completions jumped 7.0 percent compared to September of last year, which is additional new net supply added to the housing stock. The continued year-over-year growth in completions means more homes on the market in the short-term, offering some immediate relief in alleviating housing supply shortages.

“Efforts to repair damage from Hurricanes Florence and Michael will likely slow housing starts in coming months, as resources are redirected toward repairs and rebuilding.”

Home building rose in September as housing starts increased 3.7 percent compared with a year ago. However, compared with last month, housing starts fell 5.3 percent, mostly due to declines in the South from the impacts of Hurricane Florence. Furthermore, the number of homes under construction increased by 3.7 percent compared to a year ago, indicating additional new increases in the supply of homes in the future.

While the number of permits issued, which can signal how much construction is in the pipeline, decreased by 1.0 percent compared to last year, permits for single-family homes increased 2.9 percent from last month, the largest increase in a year, signaling that builders remain optimistic.

Hurricanes Hinder Housing Starts

Beyond the devastating effect of hurricanes on the lives of those in their path, hurricanes also have a negative impact on the housing market. Flooding and high winds cause damage to existing homes, housing permit and construction activity typically slows down in the impacted area, and the labor needed to help repair the hurricane damage further disrupts new housing construction. Using data from DataTree by First American and the National Hurricane Center, we estimate that Hurricane Michael will impact $125 billion of residential real estate in Florida.

Efforts to repair damage from Hurricanes Florence and Michael will likely slow housing starts in coming months, as resources are redirected toward repairs and rebuilding efforts. Overall housing starts fell 5.3 percent in September compared to last month, driven by a 13.7 percent decrease in the South, which may reflect disruptions from Hurricane Florence.

Recovery efforts will further exaggerate the existing shortage of construction workers needed to build new homes, as the demand for their skills from existing homeowners for reconstruction pulls labor away from new construction. The competition between reconstruction and new construction after hurricanes depends on the extent of the damage, but the cost of labor is likely to increase significantly, creating additional headwinds to housing starts. Past research found that average construction labor costs increased 10 percent following Hurricane Katrina in the three metro areas surrounding New Orleans 1.5 years after the storm.

One important point to note is that the reconstruction of homes that were completely destroyed by hurricane damage is actually classified as new construction by government data gatherers. For example, if a new house was built on the existing foundation of a home that was destroyed, it is considered a new housing start, according to the Census Bureau. Therefore, although we expect the impact of recent hurricanes to further limit the pace of new home construction in the immediate future, we may still see an uptick in starts in the most damaged areas because some reconstruction will actually be considered new housing starts.

September 2018 Housing Starts

For the month of September 2018, the new residential construction report shows that:

• The number of building permits issued, a leading indicator of housing starts, decreased by 1.0 percent year over year.
• Housing starts increased by 3.7 percent, compared with a year ago.
• The stock of housing units authorized to be built increased by 10.7 percent, and the number of housing units under construction increased by 3.7 percent on an annual basis.
• The number of completed homes, which is additional new net supply added to the housing stock, increased by 7.0 percent compared with a year ago.

Chief Economist Analysis Highlights

• The annual increase in completions signals modest immediate relief from the housing shortage and sends an optimistic message about the housing market.
• In September, the overall pace of housing starts, at 1.20 million units, is a 5.3 percent decrease from the previous month. Based on the less volatile three-month moving average, the volume of total residential (single- and multi-family) housing starts is 8,000 more than August 2018, and 46,000 units higher than a year ago.
• Housing starts are an important indicator of future supply as the housing market continues to face a supply constraint challenge.
• An estimated seasonally adjusted annualized rate of 1.16 million housing units were completed in September, representing a 7.0 percent increase from the September 2017 figure of 1.09 million – an important step toward producing enough housing to meet market demand.

What Insight Does Monthly Housing Start Data Provide?

Housing starts data reports the number of housing units on which construction has been started in the month reported, providing a gauge of future real estate supply levels. The source of monthly housing starts data is the “New Residential Construction Report” issued by the U.S. Census Bureau jointly with the U.S. Department of Housing and Urban Development (HUD). The data is derived from surveys of homebuilders nationwide, and three metrics are provided: building permits, housing starts and housing completions. Building permits are a leading indicator of housing starts and completions, providing insight into the housing market and overall economic activity in upcoming months. Housing starts reflect the commitment of home builders to new construction, as home builders usually don't start building a house unless they are confident it will sell upon completion. Changes in the pace of housing starts tells us a lot about the future supply of homes available in the housing market. In addition, increase in housing starts can lead to increases in construction employment, which benefits the overall economy. Once the home is completed and sold, it generates revenue for the homebuilder and other related industries, and is added to the housing stock.