The impact of rising federal funds and mortgage rates on our economy is clear. The 5-unit apartment industry, in particular, entered recession in September 2023, and these permits have been at lows during the COVID-19 recession for a long time. However, single-family permits have also been declining over the past few months. A key turning point in every economic cycle is when enough construction workers lose their jobs that it causes jobless claims to rise.
Let’s take a closer look at today’s housing starts report.
from census: building permit: The number of private housing units issued with building permits in May stood at a seasonally adjusted annual rate of 1,386,000. This is 3.8% lower than the revised rate of 1,440,000 in April and 9.5% lower than the May 2023 rate of 1,532,000.
We want to make this very simple. We have a backlog of orders that need to be built so work on the five-unit housing can continue because it takes 21 months to complete a five-unit construction project. Once these projects are completed, these construction workers will have significantly fewer residential jobs and will need to find alternatives, such as government-funded projects such as semiconductor manufacturing plants. That’s why we keep a close eye on license data.
We all know that 5-unit permits have been at the low point of the COVID-19 recession for some time, but the difference now is that single-family permits are also declining. We still have a backlog of single-family homes that need to be built, and the purchase application numbers for these new homes are growing. However, once these homes are built, it will become a construction labor issue if permits for new single-family homes continue to decline. The single-family construction workforce is already taking a hit after rates rise to 7% in 2022.
From the census: New house construction started: Private housing starts in May came to a seasonally adjusted annual rate of 1,277,000 units. This is 5.5% (±9.4%) lower than the revised estimate of 1,352,000 in April* and 19.3% (±10.0%) lower than the May 2023 estimate of 1,583,000.
As the chart below shows, housing starts are at their lowest point during the COVID-19 recession. This is happening at a time when permits for single-family homes have only recently begun to decline. As more homes are built, if we don’t increase permits soon, the workforce that is building the homes will be at risk once the work is completed. Hopefully mortgage rates will fall soon, boosting builder confidence and securing more deals. This is what happened last year.
Why is this so important?
The economic cycle has a similar pattern: First, the Federal Reserve raises interest rates too much and imposes too many restrictions, causing real estate to fall into recession first, which means that the number of construction workers in residential buildings first declines. We have been creating jobs in this area over the past few months, but if this downward trend continues, there is a risk that the labor pool will decline.
All in all, this is a disappointing report on housing starts trends, but one that has been brewing for a while. The other side of this equation is that if the construction workforce is disrupted, mortgage rates will fall, stimulating demand, so hopefully we can limit the damage to future production if that happens.
For now, though, we’ll be keeping a close eye on it. For those who hear the story about high interest rates causing inflation, here’s what they say: Ultimately, restrictive policies will prevent future housing production. As I always say: “Supply is the best way to beat inflation. Demand destruction is the short-term fix, in the long run, supply wins.”
