In data we received on Tuesday, July 20, U.S. Housing Starts increased 6.3% in June to 1.64 million units, a 3-month high. By region, housing starts rose in the South and West, and in the Northeast, single-family home construction soared more than 34% from the prior month. The data suggested residential construction continued its sharp post-COVID rebound despite the difficulties builders are having in finding labor and materials.
As seen in the LPL chart of the day, Housing Starts are now hovering in the same territory as the highs reached prior to the Great Recession; an economic instance spurred by excess housing activity and high home prices. While recent housing activity has been decidedly robust, efforts to ramp up supply have still not offset demand. The chart illustrates that the Months’ Supply of Home inventory continues to dwindle (only 2.5 months of inventory as of May). This has kept upward pressure on housing prices and reduced housing affordability.
“U.S. residential construction activity continues to be robust, but builders, faced with labor shortages and high materials costs, can’t seem to catch up with demand. The supply of home inventory continues to shrink suggesting today’s U.S. housing market may be even tighter than prior to the Great Recession,” explained LPL Financial Director of Research Marc Zabicki.
We believe the tight supply condition is not expected to dissipate anytime soon. Why? A key reason is that home building activity may be showing signs of slowing. Building Permits, a proxy for future housing construction (also released on Tuesday), fell 5.1% in June which followed a 2.9% drop in May. That’s the lowest permit activity since October 2020 and it suggests a more moderate pace of homebuilding in coming months. High materials costs and shortages of land and labor are stifling efforts to ramp up supply to meet demand.
Should current conditions persist, we believe high housing prices could begin to negatively impact consumer spending and become a net drag on economic growth in the coming quarters. We believe high prices may lead to higher mortgage payments and higher rental cost. According to the S&P CoreLogic Case Shiller Home Price Index, house prices rose 14.9% year-over-year in April (the latest data available). This same index has risen by double-digit percentages since December, a pace that is likely not sustainable for long.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index data from Bloomberg. This Research material was prepared by LPL Financial, LLC. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – Tracking # 1-05170903