Diving Into a Seemingly Strong Housing Report and the Fed’s Real Dilemma

The Census Bureau released New Residential Construction details for February 2022 this morning.

Building Permits 

• Privately‐owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,859,000. This is 1.9 percent below the revised January rate of 1,895,000, but is 7.7 percent above the February 2021 rate of 1,726,000. 
• Single‐family authorizations in February were at a rate of 1,207,000; this is 0.5 percent below the revised January figure of 1,213,000. 
• Authorizations of units in buildings with five units or more were at a rate of 597,000 in February. 

Housing Starts 

• Privately‐owned housing starts in February were at a seasonally adjusted annual rate of 1,769,000. This is 6.8 percent  above the revised January estimate of 1,657,000 and is 22.3 percent above the February 2021 rate of 1,447,000. 
• Single‐family housing starts in February were at a rate of 1,215,000; this is 5.7 percent  above the revised January figure of 1,150,000. 
• The February rate for units in buildings with five units or more was 501,000. 

Housing Completions 

• Privately‐owned housing completions in February were at a seasonally adjusted annual rate of 1,309,000. This is 5.9 percent above the revised January estimate of 1,236,000, but is 2.8 percent below the February 2021 rate of 1,347,000. 
• Single‐family housing completions in February were at a rate of 1,034,000; this is 12.1 percent above the revised January rate of 922,000. 
• The February rate for units in buildings with five units or more was 266,000. 

Huge Supply Coming 

The good news is the huge amount of supply under construction. 

Calculated Risk notes Most Housing Units Under Construction Since 1973. 

• “Since many of these are already sold, it is unlikely this is overbuilding, or that this will impact prices (although the buyers will be moving out of their current home or apartment once these homes are completed).” 
• “The completion of these units should help with rent pressure.”

I discussed supply recently in A Huge Wave of Housing Supply Will Soon Hit the Market

That’s the good news. But seasonal adjustments and year-over-year comparisons mask other issues.

Housing Starts, Permits, Completions, Not Adjusted

There were not 1.769 million homes started in February. Actually, there were 125,000 units started. 

A year ago there were 102,000. So that’s a big jump. It looks good but far less spectacular compared to 112,000 pre-pandemic. 

The report was arguably strong, but not that strong. Let’s return to seasonal adjustments for one more chart.

Housing Starts Single Family vs Multi-Family

Fed’s Dilemma 

• Guess what folks. We are building single family units that hardly anyone can afford.
• Where is the supply of apartments? Affordable rentals? Less than pre-pandemic!

Affordable Housing Activists Demand Homebuilders Build Fewer Houses

Meanwhile, Affordable Housing Activists Demand Homebuilders Build Fewer Houses

Actually, activists seek rent control. However, if “successful” the result will be less new home construction.

More than a dozens states are looking at rent controls. What will that do to supply of rentals? 

What the Fed Can and Cannot Do

• The Fed cannot control foolish moves by states.
• The Fed cannot build homes. 
• The Fed can try to cool demand for homes and home building, but a seemingly strong housing market is one of the few things the Fed has. 

Demand Destruction

Mortgage rates are already over 4%. That will cool housing, and so will the war, and so will a stock market decline. 

But will it cool rents other than what is in the pipeline? 

Looking far ahead, the great boomer die off is coming. That will add massive supply. But that is not the Fed’s near-term problem.

Fed Tiptoe

Hawkish Fed? No, This Was a Dovish Fed Meeting

The Fed penciled in 7 rate hikes this year and 4 more next year. Who believes this?

That was my comment in Hawkish Fed? No, This Was a Dovish Fed Meeting

The Fed is trying desperately to thread a needle. If you prefer consider the Fed tiptoe through the tulips. 

Actually, an attempt to walk a tightrope in 80 mile-per-hour winds might be more like it.

QT and a steepening yield curve at the far end (the only place it can occur), would destroy housing. 

And how would that help rent inflation? Food inflation? 

A Dramatic Yield Curve Transition From a Steep Front to Back End Flatness

For more discussion. please see A Dramatic Yield Curve Transition From a Steep Front to Back End Flatness

One of my readers commented “rate hikes will be transitory”. 

So will QT assuming it ever gets off the ground in the first place.

This post originated at MishTalk.Com.

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