U.S. housing starts ticked up in May; expect stronger growth in coming months

*U.S. housing starts increased by 4.3% m/m to 974k annualized in May, a small rebound from the 40% cumulative decline in March and April (Chart 1). The 12-month rolling sum of housing starts has ticked down only modestly in recent months (May: 1.29m, Mar.: 1.35m), reflecting the significant momentum in the housing sector leading into this crisis (Chart 2). Starts increased in the West (+127k to 309k) and Northeast (+6k to 53k), but continued to fall in the South (-91k to 479k) and Midwest (-2k to 133k).

*Building permits jumped by 14.4% m/m to 1.22m annualized, as both single-family (+79k to 745k) and multifamily (+75k to 475k) permits increased. The widening gap between permits and starts reflects the sizable backlog of projects that will proceed as conditions normalize (Chart 3).

*The 21-point jump in the National Association of Home Builders (NAHB) Housing Market Index in June signals strong growth in housing starts in coming months (Chart 4). According to the NAHB, “Builders report increasing demand for families seeking single-family homes in inner and outer suburbs that feature lower density neighborhoods. At the same time, elevated unemployment and the risk of new, local virus outbreaks remain a risk to the housing market.”

The Mortgage Bankers Association’s mortgage applications for loan purchases volume index increased to an 11.5-year high last week, suggesting that housing demand has exceeded the pre-COVID-19 level (Chart 5).

We have long maintained that housing will be a positive contributor to the economic recovery, primarily because of the very tight inventory of unsold homes entering this crisis. The months’ supply of unsold homes has ticked up in recent months but remains relatively low, contrasting the 2008-2009 housing crisis that involved over-building, which resulted in record highs in housing inventory (Chart 6). Additionally, mortgage rates continue to fall to new all-time lows, boosting affordability and enticing potential buyers. Clearly, the huge job losses pose a risk to the housing sector in the near term, but demographics are favorable in the intermediate run.

Note that many households are pursuing home improvement projects as they work from home: 1) sales at building materials, garden equipment, and supply dealers surged in May, jumping 9% above February’s sales (Chart 7); and 2) sales at furniture and home furnishing sales rebounded strongly in May.

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Roiana Reid, roiana.reid@berenberg-us.com

Member FINRA & SIPC
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