4.7 Percent Fewer Homes Built in U.S. in September

In September, new home construction in the U.S. dropped 4.7 percent from the previous month. With the exception of the West, most areas in the nation experienced the decline. Construction in the Midwest dropped 20.2 percent, while the South saw a decline of 9.3 percent and the Northeast experienced a drop of 9.2 percent. Residential construction rose in the West, however, at 15.7 percent.

The September drop in home construction was the greatest decline in the past six months and included both single-family home building, which dropped 4.6 percent, and apartment construction, which declined 5.1 percent. The last sharp decline of residential building occurred in March, when the industry saw a 7.7 percent drop. The latest number is far below that for the peak prior to the 2006 housing bubble burst.

According to the Department of Commerce, the current seasonally-adjusted annual rate of construction is 1.13 million units.

Despite the damage caused by Hurricanes Harvey and Irma, new construction in August fell only 0.2 percent and was affected little by the storms. Factors that did contribute to the drop in home construction included the rising cost of building materials and land and the shortage of skilled labor.

Possibly indicative of future construction activity, applications for building permits fell 4.5 percent in September, putting the annual rate at 1.22 million units. Applications for permits for single-family homes rose 2.4 percent, while those for apartments dramatically fell 16.1 percent.

There is optimism among economists, however, that there will be a future rise in new construction. In spite of the sharp drop during the past six months, new home construction remains over 6 percent above that of last year. In addition, the steady drop in unemployment brings hope that more homes will be built and sold. Buyers are also hurrying to close deals in anticipation of increasing mortgage rates. On the down side, the shortage of available homes and the resulting higher prices present an affordability problem for potential buyers.

An October National Association of Home Builders/Wells Fargo survey indicated a 4-point rise in the home builder optimism index to 68, which is the highest in 5 months. An index above 50 means a majority of home builders expressed optimism.

Despite a healthy U.S. stock market, the PHLX index, which includes housing stocks, remains flat. Shares in D.R. Horton, the largest U.S. home builder, fell 0.4 percent in September.

Because the investment in home building saw its steepest decline in almost seven years, housing dropped 0.3 percent from the nation's GDP during the second quarter of 2017.

Experts predict a strong 2018 for the U.S. housing market. Because the population continues to age, demand for housing will remain stagnant, and fewer homes on the market will result in higher prices. The older population feels less pressure to refinance; and in turn, this helps the economy because they use their home equity to purchase other goods.

There are several reasons, however, why potential home owners could be willing to purchase property. These include:

• Millennials need homes for their families, and sizes of single-family homes are decreasing to accommodate the entry-level-market consumer. This downsizing is consistent with past post-recession trends in which buyers continued to tighten their budgets.
• Rental prices are high.
• The economy is trending positive.
• Foreigners are investing in U.S. property.
• Real estate is less risky than such other investments as stocks or bonds.
• Trends in home design include energy-efficient windows, insulation and lighting and programmable digital thermostats that appeal to home owners who are concerned about high energy costs.

Some factors that may potentially affect the future U.S. housing market include:

• There's a low risk of a housing crash in most areas.
• Because wages are increasing, more millennials are interested in purchasing real estate.
• President Trump's tax policy is positive for business, and the administration's focus on deregulation takes some of the burden off businesses. Following the longest positive business cycle in the nation's history, the economy continues to grow. There are currently no indications that high inflation will return.
• Shortages in labor result in higher incomes and production costs.

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