How Does New Home Build Upside Surprise Effect Investors?

by Tim Herriage

How Does New Home Build Upside Surprise Effect Investors?

by Tim Herriage

by Tim Herriage

On November 17th 2016, U.S. Census Bureau reports that builders have increased construction in October by 26% to an annualized rate of 1.32 million units.
10-16-housing-startsThis covers both single and multifamily homes (or doors) for all four regions. This is the highest level since August 2007 and the biggest monthly jump since July 1982.  How will this effect investors?
Building new single- and multi-family homes has two positive effects. This creates more housing inventory but more importantly, the economic activity that is pulled through by land purchase and entitlement, ground breaking and construction. House construction is widely recognized as an essential economic driver that has been absent over the years since the 2008 housing recession. The housing market is being driven by a tightening labor market, which is starting to drive up wages and income generally.
“Controlling the number of households in the U.S., housing starts are only about 66% of their 50-year average,” says Trulia Chief Economist Ralph McLaughlin said. “Clearly, the homebuilding sector represents an industry that has potential to grow under a Trump stimulus plan.”
UNPACKING THE NUMBERS
2016-sfr-start-rateSingle-family home building jumped 10.7 percent to an 869,000-unit pace in October. This is the highest build rate since October 2007 and accounted for the largest share of the residential housing market.
Two important facts are the reported 1.32 million rate includes multi-family dwelling units that are not candidates for an upwardly mobile homeowner or families as tenants. Housing starts for this volatile multi-family segment soared 68.8 percent to a 454,000-unit pace. Starts for buildings with five units or more hit their highest level since June 2015.
WHAT THIS MEANS
When the U. S. Commerce Department discusses homebuilding rates they report these as relative numbers. If the October 2016 building pace was a constant throughout 2016, rain, shine, seasonal buying, etc., 1.32 million dwelling units would be built at the end of 2016, of which 869,000 homes across all fifty states. This will not be the reality.
REAL IMPACT
First, 870,000 new homes are a drop in the bucket against the approximately 130 million homes in America. This number does not even come close to 2016 demand based on household formation (U. S. Census Bureau forecasts 1.45 million for 2016,) plus those couples becoming families wishing to move from multifamily housing to a single family home.
Homebuilding is regional and dependent on available land, with commute friendly near-burbs preferred. All of this reduces options and adds upward price pressure good for homebuilders and SFR investors offering competitive rents.
Homebuilders prefer profitable projects causing them to prefer mid-market to luxury homes. Building affordable housing is more work for less profit.
WHAT NEXT?
Barring some “black swan” economic shock, it is most likely that new administration policies will stimulate business and the required incomes. The current need for housing (new and refurbished) across the country will require both renovation, rebuilding and new building on already scarce urban and near-burb locations around economic hubs.
Expect a comprehensive review of mortgage lending policies and processes to enable more buyers to become qualified borrowers and builders and landlords to do businesses. Again barring some unforeseen economic upheaval, being a landlord in a vital economic hub. Texas will remain a bright spot for the foreseeable future. For help in finding property go to Investable Realty. For investor friendly loans go to 3L Finance.

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