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Housing Starts Rise, but Completions Lag Behind

Sam Khater    |    Housing Trends

Housing starts rose smartly in September, driven by the multifamily sector, but completions are not matching that hot pace, especially for low-end homes.

The implication is clear: with demand rising but supply in the form of completions slowing, there will be more pressure on home prices to rise, especially the low end due to the Federal Housing Administration’s decision in January to cut mortgage insurance premiums by 50 basis points.

The headline numbers the Commerce Department released for September look good. They show a 6.5 percent bump up from August, to 1.21 million units. Multifamily accounts for nearly all of it, jumping 17 percent, while single family barely budged, up 30 basis points. Those are the healthiest levels since October 2007, just as the economy was heading into the Great Recession.

But any single month can be an outlier, so year over year comparisons are better for trendspotting. Starts are up 18 percent since last September, driven by multifamily, which is a shooting star at 29 percent growth.

Completions, though, the number of units actually delivered, rose by only 8percent year over year, or less than half the jump in starts. Multifamily is the driver here as well, up 20 percent from September of last year.

The number that should give the market pause, though, is the completions on one-unit structures, both attached and detached. They are up only three percent, and they are the most important segment to look at. They lag the one-unit structure starts number (up 12 percent year over year) significantly.

Since it takes 6 months to deliver a house after groundbreaking, completions is the actual new supply that is ready to be sold. What that means for home sales is definite upward pressure on home prices.

Since the FHA made its premium cut, the prices for low-end houses have jumped, since FHA is a big presence in the low-end market (houses sold for 75 percent or less than the median).

The numbers are compelling. As of August, real prices for low-end houses have jumped 10.4 percent relative to a year ago. Prices for high-end homes have been up as well, but only half as high (5.2 percent). The low-end prices, which had been up in a narrow range of around seven percent the last half of last year, really took off starting in January.

The real trend to watch here is if one unit completions will rise to match what is a re-acceleration of demand on the low end. If demand for homes to buy outstrips supply, prices will inevitably rise even higher.

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