This morning, about an hour ahead of Tuesday’s opening bell, we see the last pieces of economic data expected until after the Fed’s decision tomorrow whether or not to raise interest rates another 25 basis points to a 2.25-2.50% range: November Housing Starts and Building Permits. Both numbers came in higher than expected, at 1.256 million on the starts side and 1.368 million on the permits.
These figures were also up notably month over month: Housing Starts rose 3.2% in November from the downwardly revised 1.217 million in October; Building Permits gained 5% month over month. These numbers are even stronger when we consider expectations for Housing Starts were to have dropped 0.7% last month. The downward revision for starts swung from +1.5% in October to -1.6% in today’s read.
As we’ve seen when we look under the hood for these figures, however, it is the multi-family segment picking up the slack from the single-family housing segment. Single-family starts fell for the third straight month, this time -4.6% for November, to a tally of 824K — the lowest amount in 18 months. Multi-family starts rose a strong 22.4% last month to 432K, at +14.8% on the permits side to 480K.
These multi-family numbers are very good, but the dearth in single-family housing development is something analysts have been concerned about for quite some time. In normal housing cycles, younger adults purchase condos in multi-family units; when they begin families of their own they often buy single-family starter homes; those in those starter homes then take on a bigger mortgage at a bigger home for their bigger families. This cycle is not a normal oner in this way — those single-family starter homes are not being bought at the same rate today.
There are several reasons for this, beginning with higher interest rates on mortgages. With another quarter-point hike looming tomorrow, this does not look like an issue destined to melt away any time soon. We also see millennials reluctant to buy into the housing market, as many carry a heavy burden of student loan debt. Often they also start creating their own families later in life than earlier generations, a phenomenon begun with the baby boomers and gen-x before them.
But until this cycle is somehow broken, we can expect the single-family home market to grind slowly forward. It is one of the only economic metrics that don’t surprise to the positive on a routine basis. Consider recent reads on Retail Sales and Employment — these figures have been impressive and look to stay that way for now. But housing — usually the biggest ticket item one buys in his or her lifetime — is too big a segment of the U.S. economy to be avoided.
Will these numbers affect the Fed’s decision about interest rate policy? We wouldn’t bet on it. While the likelihood of another hike tomorrow has come down somewhat from earlier projections, they not only remain expected but have already been baked into the stock market.
However, even with the hike seemingly imminent, analysts do have hope that the Fed statement from Chair Jerome Powell will use softer, more dovish rhetoric about interest rate policy in 2019. Should Powell use language that is considered very accommodative to lower rates in the future, this could provide the catalyst market participants have been pining for.