Posted by John Lohse, CFA
Wednesday, June 21, 2023
Based on data released this week, the domestic housing market for both single and multi-family units had a very strong month in May. This is important because increased construction, especially of multi-family units, should help relieve some pressure on rents, and shelter has been one of the “sticky” components of inflation that has made it harder for the Federal Reserve (Fed) to justify a pivot in the current interest rate hiking cycle.
The U.S. Homebuilder Confidence Index released on Monday improved to an almost one-year high. The monthly report released by the National Association of Home Builders (NAHB) increased to 55, surpassing forecasts of 51. This marks the sixth consecutive month of improvement and the first time above 50 since July 2022. Additional housing data released by the U.S. Census Bureau on Tuesday indicated a monthly uptick in permits for single-family homes, increasing 4.8% from April to May. This could indicate the housing market for new single-family homes is close to a bottom.
While single-family homebuilder sentiment has warmed to positive territory, the year-over-year (YoY) growth rate of private construction spending on multi-family residences continues to massively outpace that of single-family units. As shown in the chart below, the latest U.S. Census Bureau reading on private construction spending saw a YoY increase of 24.9% for multi-family and a decline of 24.7% for single-family.
The level of multi-family units under construction has grown to a point that it has now surpassed that of single-family units, the first time this has occurred since the condo and apartment construction boom of the early 1970s.
Existing home inventories remain scant as owners balk at relinquishing the favorable mortgage rates that were locked in during the period of historically low rates in 2020 to 2021. However, the single-family permits and starts data should provide some solace for homebuyers as they grapple with the affordability challenge of purchasing in today’s market. Demand for condos and apartments from younger generations is strong and should support construction spending in the coming months, with this pipeline of new inventory helping to suppress rent prices, even as early as the end of the year. If we see that materialize it could give the Fed another data point that supports a continued pause, or even a pivot, on the current interest rate hiking cycle.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value