U.S. housing starts declined sharply in April

*U.S. housing starts declined by 30% m/m to 891k annualized in April from 1,276k in March, placing it 43% below February’s level (Chart 1). Starts declined sharply by sector – single-family (-221k to 650k) and multifamily (-164k to 241k) –and across regions –South (-187k to 532k), West (-141k to 184k), Northeast (-34k to 44k), and Midwest (-23k to 131k).

*We expect housing starts to increase in May, because construction activity has been allowed to resume in states where it was deemed “non-essential.” However, the National Association of Home Builders Housing Market Index suggests that the increase in starts in May will be modest (Chart 2).

*Building permits declined by 21% m/m to 1,074k annualized in April from 1,356k in March, remaining well above the level of starts. The widening gap between permits and starts reflects the backlog of projects that will proceed as restrictions on construction are lifted (Chart 3).

We expect residential construction to be a positive contributor to the economic recovery. Historically low mortgage rates and attractive prices in some regions will pull potential buyers off the sidelines, providing some offset to the significant job losses, declines in household net worth, and re-tightening of lending standards. But demand will not immediately return to pre-pandemic levels.

The tight supply of for-sale homes will drive demand for new construction. The supply of new and existing homes for sale entering this crisis was historically low, in contrast to the lead-up to the 2008 housing crisis when supply surged (Chart 4). We expect two factors to constrain supply: 1) the mortgage forbearance provision in the CARES Act on mortgages backed by federal agencies is preventing a wave of foreclosures, at least in the near term; and 2) some existing homeowners may hold off on selling their homes for now if they expect higher prices in the future.

High frequency indicators suggest that housing demand is bouncing back. The Mortgage Bankers Association’s mortgage applications for loan purchases volume index has increased for four consecutive weeks and is now just 9.4% below its year-ago level (Chart 5). Applications had fallen as much as 35% yr/yr in early April. Lumber futures have increased to a two-month high, reflecting growing demand for home improvement projects as well as new construction (Chart 6).

Demographics remain favorable for housing in the intermediate run. Over the next five years the 30-39 age cohort, a group that will boost demand for new housing units as they form families, is projected to increase by 2.6m. Note that homeownership rates for this cohort declined through most of the last expansion and only started to increase in recent years (Chart 7).

Chart 1:

Chart 2:

Chart 3:

Chart 4:

Chart 5:

Chart 6:

Chart 7:

Roiana Reid, roiana.reid@berenberg-us.com

Member FINRA & SIPC
This email and any files or attachments transmitted with it may contain confidential or privileged information and are intended solely for the use of the intended recipient. If you are not the intended recipient, please do not copy, retain, disclose or use any part of the message or its attachments. Please notify the sender immediately by return email and destroy or delete any copies. Dissemination or use of this information by anyone other than the intended recipient is unauthorized and may be illegal. Communications by email cannot be guaranteed to be secure or error-free. Emails and their attachments are subject to being intercepted, becoming corrupted, getting lost or delayed, or may contain viruses. Therefore, neither the sender nor Berenberg Capital Markets LLC (BCM) accepts any liability for any errors or omissions in the content of this message or problems in its transmission, including those arising as a result of its transmission over the internet.
BCM does not assume liability for the correctness and completeness of all information given and/or attachments contained herein. The provided information has not been checked by a third party, especially an independent auditing firm. BCM explicitly points to the stated date of preparation. The information given can become incorrect due to passage of time and/or as a result of legal, political, economic or other changes. BCM does not assume responsibility to indicate such changes and/or to publish an updated document. Any document(s) or attachment(s) is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.
In light of upcoming regulatory changes, please be informed that BCM will continue to share information with you until unsubscribe@berenberg-us.com receives your termination/deletion request. For more information about the General Data Protection Regulation (GDPR) and our privacy policies please refer to https://www.berenberg-us.com/legal-notice. BCM reserves all the rights in this communication. No part of this communication or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without BCM’s prior written consent.
The information contained herein and sourced may have been adopted from various news sources, for example, Bloomberg, Reuters, Street Account and various other sources. BCM does not claim accuracy, completeness, timeliness, suitability, or otherwise regarding all the information on the securities, stock markets, or developments referred to within. On no account should the Content be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgments. BCM is not responsible for any recipient(s) use of this information. This Content is not a solicitation or an offer to buy or sell any of the securities contained herein. This information does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of clients. Clients should consider whether any advice or recommendation in this Content is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of securities which may be referred to in this Content and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain securities.