Housing starts are a critical part of several markets. Not only are they a direct impact on the real estate market, they're also something of a bellwether of consumer confidence. After all, no one starts building a house if they're feeling shaky about their chances of holding a job. The most recent news about housing starts for December should leave a lot of folks feeling plenty optimistic going forward, as not only were housing starts up in December a healthy 16.9%, it's now a new record the likes of which hasn't been seen since 2006.
Optimism for the Price of a Few Numbers
Activity was up all over to generate that 16.9% jump, which represented an extra 1,608,000 units under way. Though that number is seasonally adjusted—starting to build a house in the dying days of fall and the earliest part of winter is a program fraught with peril and delays—it's still a major leap forward.
What's more, the housing starts for November got a revision, and upward; the earlier numbers showed 1,365,000 housing starts, while the revised numbers threw an extra 10,000 units into the mix.
Perhaps best of all, the 1,608,000 represents a handy defeat of estimates posed previously by Reuters, who projected that December would feature a match for November at 1,375,000 units. This puts housing up fully 40.8 percent as compared to December 2018. Unusually, though, building permits were down in December off the corresponding figure in November; building permits for December hit 1.416 million units, which is down 3.9% off a 12.5-year high seen in November.
A Booming Time for Building
Several separate features of the larger market go into the surprising jump in housing starts. Perhaps the biggest such feature is the current fixed rate on a 30-year mortgage. Based on data from Freddie Mac, back in November 2018, such a loan carried up around 4.94% interest, while now, it's lost over a point to 3.65%. Whether you want to consider those numbers objectively or as a percentage, the end result is that taking out a mortgage is a whole lot cheaper now than it was back then. That's likely encouraging some pent-up demand to take a run at the American Dream that is homeownership.
As noted previously, confidence is also a factor in building starts. New reports suggest that homebuilder confidence is down somewhat this month. Overall, however, the total is on par with levels last seen all the way back in the dot-com boom of 1999.
In fact, those same reports suggest that there's one big problem in the way for homebuilders that may actually choke off this rally before too much longer: a lack of lots. Homebuilders find themselves struggling to find empty real estate on which to build, along with shortages of labor to assist in homebuilding. Buyers, meanwhile, are starting to feel this shortfall themselves, finding it difficult to find available inventory, especially in the “starter home” market.
The market is trying desperately to keep up; single-family homebuilding was up 11.2% for December, with the biggest upticks seen in the South and the Midwest. The West and Northeast, however, saw levels decline a bit.
A Recession-Proof Rally Opportunity?
The problem with rising housing starts, of course, is that they can't rise forever. Eventually every available bit of land is purchased, every housing start that can be started is started. We're certainly seeing opportunities afoot here; just a week ago, we put out word on KB Homes (NYSE: KBH) that recent revenue shortfall—and the price decline that often follows such an event—could represent a chance to buy-in. After all, it wasn't like KB Homes fell on paltry estimates; revenue was still up 15.6 percent over the same time the previous year; just because analysts expected more than that doesn't make it a bad buy.
What's more, it's abundantly clear that housing is a hot commodity right now. Building starts continue to increase and permit applications are high if wavering a bit from one month to the next.
Even if there's a decline in the economy coming—and we know there has to be a decline at some point—that still bodes well for homebuilders. Like we posited earlier with At Home (NYSE: HOME), people tend to put some extra punch in their home environment when they're about to be spending a lot of time in it. If there is an economic decline, the staycation concept will kick in some value as people seek to replicate the vacation experience in their own homes.
Thus, homebuilders have an excellent chance of doing well in the market right now. They can continue to ride the wave of homebuyers upward, and when that wave inevitably suffers, they can pivot to enhancing current homes to be in better keeping with staycation-related trending. That's a win-win, and one that makes this market sector very attractive.