July’s Housing Report and the Future

By at 19 August, 2021, 9:32 am

by Raymond J. Keating –

Residential housing is a significant part of the U.S. economy, and it’s big on small business. After all, based on the latest Census Bureau data, in the residential building construction sector, for example, 92.3 percent of employer firms have fewer than 10 employees, and 97.4 percent fewer than 20 workers.

So, when the latest housing data hits, it’s overwhelmingly about small businesses.

The July report on new monthly residential construction pointed to a cooling but still fairly strong housing market. The key question is: Are short-term challenges, such as in the supply chain and in terms of labor, causing a temporary pause or decline, or is this not only about these issues but also perhaps saying something about the emerging state of the consumer and overall economy?

Housing starts (at a seasonally adjust annual rate) in July fell by 7 percent, while housing permits (an indicator of future starts) grew by 2.6 percent.

As noted in the following chart, permits – a signal for future housing starts – remain above their pre-pandemic levels. However, they have fallen off notably from the start of this year.

Source: Federal Reserve Bank of St. Louis, FRED

Meanwhile, housing starts in July were not only down from their recent March 2021 high, but also moved below the pre-pandemic level in February 2020.

Source: Federal Reserve Bank of St. Louis, FRED

This permit-starts story certainly points to immediate challenges regarding supply chain problems and labor shortages. And that was backed up by the NAHB/Wells Fargo Housing Market Index (HMI) released on August 17 that showed that home builder sentiment fell this month to its lowest level since July 2020 due to “construction costs and supply shortages.”

NAHB chief economist Robert Dietz observed, “While the demographics and interest for home buying remain solid, higher costs and material access issues have resulted in lower levels of home building and even put a hold on some new home sales. While these supply-side limitations are holding back the market, our expectation is that production bottlenecks should ease over the coming months and the market should return to more normal conditions.”

I agree, but external factors, such as the costly tax and regulatory policies being pushed by the Biden administration and Congress, raise questions and uncertainty about where the broader economy, and therefore, housing, might be headed.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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