skip navigation

By the Numbers

Featuring brief segments of economic analysis from our senior economist Michael Bazdarich, PhD.

The economic analysis we previously featured in By the Numbers is now available on the Western Asset Blog. This page will no longer be updated.

May Housing Starts Continue on a Relatively Orderly Path of Descent

Headline housing starts declined -0.9% in May according to data released this morning by the Census Bureau, but there was a sharp, +3.7% revision to the April level. Similarly, the more important single-family starts statistics showed a -6.4% decline in May, but there was a +2.6% revision to the April level. On net, we read these data as indicating a continued but reasonably orderly decline in homebuilding activity, a decline necessary to address excess inventories of unsold new homes.

We haven’t covered the housing markets in these By The Numbers installments in a few months, but the picture there is pretty much the same as what we found it to be previously. Homebuilders got ahead of demand when they increased construction rates in 2016 and 2017, to the point that accumulated inventories of unsold new homes reached 7.4 months’ worth of sales late last year, an unsustainably high level of inventories.

In response, builders have been cutting back production since late-2017, but new-home sales declined as well early last year, so that inventories had continued to accumulate. Builders then employed discount pricing to move product, so new-home sales bounced in the early months of this year, allowing builders to start to address excess inventories. The combination of continued declines in (underlying levels of) single-family starts and discount-boosted sales has brought inventories down to 6 months’ sales in recent months.

However, discounted prices mean squeezed profit margins, and even 6 months’ worth of sales is an unsustainably high inventory level, so starts levels must go lower yet. This is all the more the case given that it looks as though builders moved to raise prices and repair margins in April, so that new-home sales are likely to pull back toward mid-2018 levels in months to come.

This is not a disaster scenario for the housing market, and we don’t think the current pace of decline in starts activity is steep enough to threaten recession. After all, starts were plunging at a 30% annual rate over 2005-2007, while the drop in the last year is only on the order of 10% or so. Also, housing demand is holding up dramatically better presently than was the case in 2005-2007. So, the bad news is that the recent declining trend in homebuilding has a ways to go yet. The good news is that that decline is still relatively orderly and mild.

Sales and Starts of New, Single-Family Homes
Sales and Starts of New, Single-Family Homes
Source: Census Bureau. As of 31 May 19

Michael Bazdarich

Product Specialist/Economist

Mike brings more than 43 years of experience to his position. "By the Numbers" will address economic data releases that are pertinent to a broad range of investors.

Prior to joining the Firm in 2005, Mike ran his own consulting firm, MB Economics. He earned his PhD in Economics at the University of Chicago.

Sign up to receive email updates as new reports are released.

© Western Asset Management Company, LLC 2020. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorised and regulated by Comissão de Valores Mobiliários and Banco Central do Brasil. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK and EEA countries as defined by the FCA or MiFID II rules.