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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.

August Housing Starts Continue to Confound Recession Narrative

Single-family housing starts rose by 3.7% in August to a level of 919,000 units. Multi-family starts rose a whopping 32.8%, to 445,999 units. Multi-family units are generally extremely volatile month-to-month. The trend there has been flat for the last four months, and it is a good bet that the August gain is mere random fluctuation. The single-family gain is another story altogether, and an interesting one.

As you can see in the accompanying chart, single-family starts have been on a declining trend since early-2018, so the gains of the last three months are a distinct contra-trend move. This is one more mark against the contention that the US economy is verging toward recession. We have remarked previously how job growth is holding well all things considered, how the factory sector looks to be showing some signs of a bounce, and how consumer spending is growing robustly. Today’s data extend this skein to the construction sector in general and to housing in particular.

Our story line has been that housing would continue soft through the end of the year. We believe that inventories of unsold new homes had reached intolerably high levels by early-2018, and that it was attempts to rein in excessive inventories that drove the declines in starts over the last 18 months.

The chart shows both starts and sales of new, single-family homes. The scales on the chart are adjusted to reflect the disparity in levels between the two series, since owner-builds show up in the starts data but not in new-home sales. In other words, by our calculations, the fact that the blue line is above the green line over most of the chart points to ever-increasing levels of unsold new homes on the market. By late-2018, new-home inventories had reached 7.4 months’ worth of sales. At that time, builders started discounting prices, which helped boost sales levels to pare inventories. Declining mortgage rates have helped as well. However, levels of inventories have been pared only marginally, and as of July, inventories remained above 6 months’ worth of sales, compared to "normal" levels of about 4 months’ sales.

Even with this downbeat housing story, we still thought the recession narrative was wrong. The fact that housing starts have confounded our story to the upside—along with the other favorable data released lately—is a further knock against the recession story.

We still expect starts to decline over the rest of the year in order to finally bring home inventories back in line. However, the fact that lately starts have bounced nicely anyway underlines the contention that the past year’s softness is a managed response to excess inventories, and NOT evidence of a relentless plunge in the sector.

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

Michael Bazdarich

Product Specialist/Economist

Mike brings more than 45 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.

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