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Today’s new construction report from the Census Bureau showed month-to-month growth in housing starts, but falling housing permits. Both of these data lines are currently still at the levels we saw in the early part of the COVID-19 recession. However, employment for residential construction workers hasn’t fallen at all, even with the decline in housing starts and permits. Why haven’t the homebuilders started doing layoffs?
For those looking for recession signals, a decrease in the number of residential construction workers is usually an early sign. But despite housing permits being stagnant for years, we haven’t seen the layoffs of construction workers that typically indicate an economic downturn, as we have in previous cycles.
What’s going on? I have often said that this housing cycle is the most unique I have seen in decades so today I want to provide some clarity since it’s so important to the economic cycle.
Housing starts and permits
Here are the numbers from today’s Census report, which shows that both housing starts and permits are down year over year.
From Census: Housing Starts: Privately-owned housing starts in February were at a seasonally adjusted annual rate of 1,501,000. This is 11.2 percent (±15.7 percent)* above the revised January estimate of 1,350,000, but is 2.9 percent (±13.0 percent)* below the February 2024 rate of 1,546,000.
Building Permits: Privately-owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,456,000. This is 1.2 percent below the revised January rate of 1,473,000 and is 6.8 percent below the February 2024 rate of 1,563,000.
Reasons we haven’t seen layoffs yet
1. New home sales aren’t crashing anymore
New home sales peaked in October of 2020 with 1,031,000 new home sales and then in 2022 that number crashed all the way down to 519,000 by June. However, after that decline — and when mortgage rates started to fall late in 2022 — home sales rebounded all the way back to 741,0000.
For the past two years, new home sales have ranged between 625,000-741,000. If new home sales were heading back toward 500,000 and went below that number, we would be seeing construction workers being laid off by now, but new home sales have stabilized in a small range since early 2023.
2. Active existing inventory hit all-time lows after Covid, benefitting builders
The homebuilders’ biggest competition is the active inventory from the existing home sales market and in the previous decade there were plenty of cheaper existing homes with lower rates that the builders had to compete against. After Covid, that wasn’t the case: active inventory collapsed to all-time lows and in our data line the number of existing homes for sale got as low as 240,000 in 2022.
However, once mortgage rates rose in 2022, the active inventory of existing homes never got back to normal and the homebuilders could offer lower rates than what buyers of existing homes could get. The builders have been using this advantage for years.
3. Apartment construction boom, backlog and long turn time
This is the first economic cycle in decades where single-family permits fell (in 2022) but the number of 5-unit permits increased: typically these both fall together and then the recession data perks up. We had a unique cycle where labor was still needed because we had a backlog of orders for apartments, which took a historically long time to finish — almost two years. Then, in late 2022, mortgage rates fell and the builders started selling homes again.
With the backlog of homes that needed to be done and a very low bar of new home sales to work with, the builders kept pushing single-family permits and kept the labor required to finish old projects.
With all that said, the builders confidence data has been fading lately and if mortgage rates head back toward 7.5%, they won’t have the luxury of low inventory, low completed units and excess profit margins to help them as much as they have in the past few years. If mortgage rates can just head toward 6% and stay there, the builders can sell more homes because we aren’t working from an extreme elevated number here — the last new home sales report came in at 657,000.
Conclusion
I understand that many people tracking economic cycles might feel overwhelmed by the recent housing data — it can be quite confusing. My best advice would be to keep an eye on the total completed units, profit margins, new home sales and permits. If we start moving toward levels seen in 2022 or lower, that could be concerning.
On the bright side, if mortgage rates drop to around 6%, the single-family housing market may still find a way to stay resilient, even though the apartment sector might face more challenges.
Also, it’s important to remember that a large part of the residential construction workforce is engaged in remodeling, so turning to insights from Home Depot or Lowe‘s could be beneficial. We’re all navigating this uncertain landscape together and staying informed can make a difference.
