Housing starts cooled again in February, the Commerce Department said Wednesday.
Traders and investors weren’t interested due to the proximity of the March Fed meeting, but given the state of the US housing market (i.e., the very real possibility that it’s a giant bubble again), it’s incumbent upon anyone who fancies themselves a keen macro observer to at least note incremental information.
Starts dropped 10.3% to a 1.42 million annual pace. That was well shy of the 1.56 million the market expected.
Notably, the February drop was the second consecutive decline.
It’s the same narrative over and over. The pandemic catalyzed a new housing mania in the US, and the Fed’s response to the crisis served to turbocharge things.
Over the course of 2020, Americans were prone to fleeing urban centers for the suburbs, as the allure of city life diminished with restaurants and venues shuttered. At the same time, the proliferation of work-from-home arrangements made moving seem more palatable, as the prospect of long commutes was diminished commensurate with an organizational shift towards remote work. The Fed, meanwhile, helped push mortgage rates to record lows.
Now, some of those dynamics are reversing, albeit slowly at first. Mortgage rates, for example, have risen four consecutive weeks (figure below). Obviously, they’re still historically low.
Still, it’s far too early (and that’s probably an understatement) to call a top. Weather played a role in February’s drop in residential starts, and other metrics pointed to ongoing froth in the market.
The pace of applications, while falling, was still above starts. The makes seven months in a row. Demand remains strong.
At the same time, the market will eventually bump against the reality that rising prices curtail would-be buyers’ capacity to, for example, make a respectable downpayment.
Stimulus may help (directly and indirectly), but rising costs have a way of feeding on themselves. For example, voracious demand drives up the price of construction materials, which in turn pushes prices higher still, and so on, until demand eventually abates.
So far, there’s little evidence to suggest the frenzy is over. While applications for single-family homes dropped to a three-month low, single-family backlogs hit 121,000 last month. That was the highest since the eve of the financial crisis.
Supply & demand, mixed into the pandemic singularity and nonlinear dynamics. Homes will go up, then drop, after unsustainable gains.
Pozsar rate thoughts are always well thought out, but the best thing I’ve read about interest rates were from a twitter post from a CFA (Michael Lebowitz):
“Currently, investors are fretting about higher interest rates despite the fact they have only risen to the lowest levels of the past 300 years.
==> Of course one might adjust that for inflation and do a natural log, but the point is well taken!
Is the market cooling, yes, it froze into solid ice last month:
“Construction is a weather-sensitive sector. In the February jobs report, where most sectors saw improvement, employment in construction fell 61,000 in the month. The Bureau of Labor Statistics noted “severe winter weather across much of the country may have held down employment” in the industry.
The number of homes authorized and awaiting ground-breaking rose 3.9% to 214,000 in February. Backlogs of single-family units jumped 6.1% to 121,000 last month, the highest since May 2007.”