Housing starts have been strong this year and the monthly housing starts report released by The Census Bureau Tuesday at 8:30am should be no exception.  The Bloomberg consensus for March housing starts came in at seasonally adjusted annual rate of 1.25mln, down 3% from February’s rate of 1.29mln.  Such a dip is to be expected this month after unseasonably warm weather in both January and February spurred more starts earlier than usual.  The continued strength of the economy has been a major factor in allowing the housing market to remain steady and economists believe it will keep growing as demand outstrips supply.

 

Five key factors will affect March housing starts:

 

Home Sales Are Increasing

Existing home sales were at their highest in almost a decade this January and slowed only slightly in February, still coming in 5.4% higher than this time last year. The trend is on pace to continue due to low inventory, said Stuart Hoffman, an economist at PNC Bank.

“We are going to see some continued upper pressure on both new and existing homes sales, because the number of buyers seems to be outstretching the number of sellers. It’s a seller’s market,” he said.

New homes sales also rose 6.1% in February, signaling potential buyers may have more available capital, possibly buoyed by growing wages in the stronger economy.

 

Millennials Are Buying, Not Renting

Millennials are now a key demographic bolstering the housing market as they continue to move out of rentals in cities and into homes in the suburbs.

“They display the same aspirations about homeownership as the baby boomers did,” said Robert Denk, a senior economist at the National Association of Home Builders.

But with inventory so low, rising prices could create an affordability problem for the younger generation, who may be priced out of the market. House price appreciation has been strong, with sales almost 9% higher than this time last year.

For now, though, these factors are propelling the market further.

“People still want to live in houses – that pent up demand is going to carry us forward,” said Denk.

Builder Confidence Is High 

Heightened optimism among builders is a reflection of the expectation of continued efforts at deregulation by the Trump administration. Issues like lack of available land and suitable plots on which to break ground have previously been concerns holding back construction. These problems may no longer stand in the way as regulatory reform continues to be rolled out by the president.

Builder confidence is also being supported by home buyer behavior.

“Our housing market index shows that foot traffic is strong – builders are telling us that they’re seeing people come in to look at new homes, and the new home sales numbers are telling us that people are buying these homes,” said Michael Neal, a senior economist at NAHB.

Rising Interest Rates 

The Federal Reserve raised interest rates in March for the third time since the Great Recession and the second time in three months. While upping short term interest rates on a gradual basis does not directly affect mortgage rates, it does affect the 10-year treasury rate – currently at 2.24% – which is, in part, what determines the 30-year fixed mortgage rate. The 30-year fixed FHA rate is now at 4.25%, which is still historically low despite the recent bumps.

For now, these increases are not deterring buyers and Neal does not expect the higher rates to strain affordability.

“The Fed has demonstrated a history of raising rates at a pace the economy can absorb,” said Neal. “You’re going to see rates rise as job growth continues, and an increase in the Fed funds rate will also reflect wage gains.”

It’s the Economy, Stupid 

Whether President Trump can take credit or not, the recent gains in both employment and wages are invigorating the housing market. Despite only adding 98,000 non-farm jobs in March, the unemployment rate dropped to a 10-year low of 4.5%. Construction hiring rose only slightly with 6,882 jobs, but this still gave builders confidence after 59,000 new jobs were added to the industry in February.

Many workers left construction during the recession and went into energy instead, said economist Bernard Baumohl, so new and ideally skilled workers are a welcome addition. If available labor increases, housing inventory may be able to grow. Job growth for construction has averaged 33,000 per month for 2017.

Wages also rose in the tightening labor market with hourly earnings up 2.7% over the year.  Rising wages may ultimately push home prices upward if the trend continues.