Housing Starts Down (Optically)
Wednesday, February 20
Due to a double-digit dip on the typically volatile multifamily side, nationwide housing starts declined 8.5 percent to a seasonally adjusted annual rate of 890,000 units in January. Meanwhile, issuance of permits for new-home construction rose 1.8 percent to 925,000 units – the quickest pace since mid-2008.
In January, single-family housing starts were virtually unchanged from an improved pace in the previous month, registering a 0.8 percent gain to 613,000 units. This was the strongest pace of single-family housing production since July 2008. Meanwhile, multifamily housing starts, which tend to display significant month-to-month volatility, declined 24.1 percent to 277,000 units.
What Are Starts And Permits?
The US Census Bureau tracks construction spending as measured by New Starts and Building Permits. Not all the houses with building permits get started (built), and not all started units get completed, although most do. A start is defined as excavation (ground breaking) for the footings or foundation of a residential structure. For a multifamily structure, all units are counted as started when the structure is started.
Essentially, starts are reflective of new supply coming online during the build cycle for each type of asset (typically 3-9 months for single family housing vs. a couple of years for most multifamily product), while permits indicate potential supply coming online further down the road.
What It Means:
This morning’s housing starts data showed a steep drop-off of 8.5% to 890,000 units but the decline was all attributed to a fewer multifamily starts (-24%). However, this is really just a measure of volatility; no one believes that multifamily starts are going to slide anytime soon. In fact, the publicly traded homebuilders are all starting to get into the business of offering rentals. This morning Toll Brothers (TOL) reported that they were starting to build apartments for rent which would begin delivering in 2015, while Lennar (LEN) announced last month they were getting in the business in a pretty meaningful fashion ($1B pipeline). Beazer Homes (BZH) announced last year that they would be investing directly in renting single family homes through a REIT structure joint venture with KKR (typically picking up vacant homes in their existing communities to support pricing while generating cash flow from rentals).
My guess is that they will look to sell these to more efficient tax vehicles (depending on the status of their existing deferred tax assets) or directly to their joint venture partners in the projects (which right now include several private equity shops).
Single-family starts were up a little under 1%, indicating a slow and steady recovery there.
Overall, I think this is just indicative of where new supply will continue to come online. Single family home construction remains not terribly appealing compared to developing rental assets given that the prices on existing homes are so much lower (and attractive) to buyers and investors – this should provide additional price support (generally speaking) to SFH for the time being, while it could eventually put a cap on rent growth as these multifamily projects come online.