Construction of new U.S. homes reached its highest level in 13 years in December 2019, according to a report from the Commerce Department. The latest spike depicts the strength of the U.S. housing market, attributable to low mortgage rates, solid job market and resilient consumer confidence.  

Housing Starts

According to the Department of Housing and Urban Development and Department of Commerce, housing starts jumped 16.9% in December to a seasonally adjusted annual rate of 1.608 million, exceeding market expectation by 17%. The data for November was revised upward to 1.375 million units from 1.365 million units reported previously. Exceptionally warm December, a rise in multi-family construction (mainly in the Midwest) and seasonal adjustments led to the surge. Housing starts soared 40.8% in December on a year-over-year basis.

During the month, single-family starts — accounting for the largest share of the housing market — grew 11.2% from November to 1.055 million units, which marks the highest level since 2007. Multifamily starts — comprising apartment complexes and condos — increased an impressive 32% to 536,000 units (the highest since 1986), according to the report.

Construction of new homes grew 3.2% to an estimated 1.290 million housing units in 2019 versus 3.9% growth in 2018.

Building Permits

Building permits — a bellwether for future home construction — fell 3.9% in December from the previous month to a seasonally adjusted annual rate of 1.416 million, missing the consensus mark by 3.6%. However, permits were 5.8% higher than the December 2018 rate, with 10.8% jump in single-family permits. In 2019, overall permits rose 3.9% from a year ago to 1.369 million housing units.

Single-family housing building permits dipped 0.5% in December from the prior month, following seven straight months of gains. Permits for the construction of multi-family homes also dropped 9.6% in the final month of 2019.

Will the Rally Fizzle Out?

The housing market — especially single-family — has regained momentum, beating market expectations on major data points. Lower mortgage rates on account of Fed’s dovish stance and a solid labor market have been largely driving the recent resurgence in the housing market, which hasn’t contributed to economic growth since the end of 2017.

Average 30-year fixed-rate mortgages were recorded at 3.9% in 2019, according to mortgage giant Freddie Mac, making last year the fourth lowest for mortgage rates since the company began doing a weekly survey in 1971. The most important factor fueling the construction rally is the three interest rate cuts by the Federal Reserve in 2019.

Meanwhile, builders' confidence slipped a notch this month, according to the Housing Market Index reading from the National Association of Home Builders and Wells Fargo. Nonetheless, optimism levels in December and January have been the highest since July 1999. Yet, we cannot ignore the housing industry’s share of weaknesses. Builders continue to grapple with shortage of lots and labor, and buyers face a lack of inventory, particularly for first-time homes.

The U.S. housing market, accounting for about 3.1% of the economy, plays an important role in the evaluation of overall economic growth. Low interest rates, a healthy labor market and the need for added inventory are expected to further drive homebuilding in 2020. These factors will likely contribute to GDP in the fourth quarter as well. Notably, the housing share of GDP rose for the first time in six quarters, increasing to 14.6% in third-quarter 2019, per a report from the National Association of Home Builders. The report also states that the homebuilding and remodeling section increased to 3.11% of the total GDP, and added 0.18 basis points to the overall GDP growth rate.

While some market pundits are of the opinion that this latest double-digit gain in starts may not reflect in January’s data, “the trend in activity remains quite positive, and as more units are completed, inventories will grow, and this will support a faster pace of home sales in the spring of 2020”, as stated by Mike Fratantoni, chief economist at the Mortgage Bankers Association.

The Zacks Building Products - Home Builders industry — which include biggies like Lennar LEN, D.R. Horton DHI, PulteGroup PHM, KB Home KBH and the likes — has jumped 46.6% in a year’s time, outperforming the broader S&P 500 composite’s 23.8% rally.

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