Momentum Builds in Housing Market

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Kiplinger’s latest forecast on housing starts and home sales

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Residential construction started 2018 on a good note. Total housing starts jumped 9.7% in January to a seasonally adjusted annual rate of 1.326 million. With the January rise, residential construction regained the ground it had lost in the last months of 2017. Single-family starts rose 3.7% from December, continuing a long-term climb despite the volatility of recent months. Multifamily construction skyrocketed 23.7%. The South and the West, which account for the bulk of new-home construction, are seeing strong population and employment growth. This is reflected in the strong growth in single-family building permits last year in cities like Houston, Dallas, Austin and Denver. It also indicates that residential construction will be strong in these metro areas this year.

New-home sales slipped in January because of a sharp decline in the South; they were down 7.8% from December. This was the second consecutive month of declines. The trend in new-home sales has moved upward over the past year and builders expect home sales to continue increasing in coming months.

See Also: A Housing Shortage Looms as Builders Can’t Keep Up

Existing-home sales are being restrained by tight inventories. They fell 3.2% in January to a seasonally adjusted rate of 5.38 million. Inventories were down 9.5% — the 32nd month of consecutive year-over-year declines. The low inventories mean that it would take 3.4 months at the current sales pace to sell all the homes on the market. The National Association of Realtors reported that its pending home sales index, which tracks contracts signed for the purchase of an existing home, fell 4.7% in January, indicating that sales will continue to fall in the next couple of months.

Home price growth picked up in December, continuing its steady ascent. The S&P CoreLogic Case-Shiller National Home Price Index rose 6.3% in December year-over-year, after a 6.2% gain in November. Home price pressures remain strong as the housing market continues to face very tight inventories relative to demand, particularly in Western markets. Higher interest rates will raise financing costs, especially for first-time home buyers. First-timers often rely more on credit than trade-up buyers, who have built up equity in their current properties. This means that price growth could slow down a bit later this year as some buyers are pushed back to the sidelines.

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