Read the Construction Tea Leaves
Housing-construction data can offer a glimpse of where the mortgage
business is headed
By Dick Lepre
Dick Lepre is senior loan adviser for RPM Mortgage of
Alamo, California, a division of LendUS. He has been in
the mortgage business since 1992 and has been writing a
weekly e-mail newsletter on macroeconomics, mortgages
and housing since 1995. Lepre (NMLS #302379) is from New
York City, but he has lived in the San Francisco Bay Area since
1968. He has a degree in physics from Notre Dame. Follow
him on Twitter @dicklepre. Reach him at (415) 244-9383 or
LendUS, LLC — NMLS No. 1938. Licensed by the Department
of Business Oversight under the CA Residential Mortgage
Lending Act. Equal Housing Opportunity.
Getting a grasp on how much construction will occur in the near future serves two purposes for mortgage originators. First, it offers an estimate of how many new
homes will be built and, as such, measures opportunity
to provide financing for those homes. And, second, a
broad sense of total construction provides a metric of
perceived economic growth.
People in business need to plan ahead. Retail stores
need to hire and order stock for Christmas. Ballparks
need more hot dogs when attendance spikes. Similarly, mortgage originators need to have an idea of
how much business will be coming so that they can
hire if necessary.
Mortgages are made for one of three things: refinancing, existing-home purchases or new-home purchases. With the refinance market hurting because of
rising interest rates, and with existing-home sales in a
slump as the year comes to a close, it is easy for mortgage originators to become depressed, but data on
the building of new homes provides some cause for
Construction in the broadest sense can be divided into
five categories: single-family homes; two- to four-unit
dwellings; multifamily (apartment complexes) with
five or more units; mixed-use properties, which combine living and commercial space; and pure commercial — i.e., office, retail or industrial properties.
Mixed-use properties generally have commercial on
the ground floor or the lower levels with apartments
or condos above. This is most often seen in cities.
Multifamily can be subdivided into rental apartments
and condominium complexes — which have units that
are individually owned rather than leased like apartment units. Most mortgage originators are interested
in single-family, two- to four-unit and condo properties.
Three pieces of data that are important to mortgage originators are new-home sales, housing starts
and building permits. Because all housing is local, it is
necessary to look at these data sets region by region.
Most mortgage originators do business within a limited geographic area and, consequently, what is most
important to them is how many single-family and
condo units are being built in that area.
The number to pay closest attention to is housing
starts. Housing starts are measured in units. A single-family home is one start. A duplex is two starts. A
100-unit apartment building is 100 starts. Starts as
used here are private starts only. Public housing is not
counted. Manufactured housing is not counted.
It’s typically thought that the U.S. needs about
1.5 million housing starts per year to keep pace with
population growth and scrappage of units either
destroyed by disaster or torn down after becoming
obsolete. The last time that the U.S. had more than
1.5 million housing starts was in late 2006.
To understand how frustrating it is to forecast future
housing starts, consider a report published by the
Congressional Budget Office (CBO) in 2008. That paper
was trying to estimate when the nation would get back
to 1.5 million annual starts.
The optimistic scenario said the end of 2009. The
pessimistic estimate was that the country would not
get there until the second half of 2012. A decade after
the CBO report was published, housing starts are still
less than 1.3 million. The lesson to be learned is that no
one can accurately forecast housing starts two years
into the future.
The best indicator for what housing starts will be in the
near term is to look at building permits at the present.
While not all permits turn into starts, those starts need
permits. A housing start is defined as excavation (or
groundbreaking) for the footings or foundation of a
In the case of a multistory building, all units are
counted as started when the structure is started. The
average length of time from permit to start for a single-family home is one month for a contractor-built structure. For buildings with two to four units, the average
length of time from permit to start is two months.
Housing-start and building-permit data are published jointly each month by the U.S. Census Bureau
and the U.S. Department of Housing and Urban Development. The report covers all residential units, from
single-family homes to multifamily buildings.
While that gives the big picture about homebuilding in the nation, most mortgage originators are more
interested in what is happening locally. Data about
building permits by state and metro area are collected
by the U.S. Census Bureau and reported through the
National Association of Home Builders (NAHB) in
spreadsheets posted to the NAHB webpage. The data,
which also can be found on the Census Bureau website, is broken down in detail by community.
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