International | Jun 01 2018
The US housing market is still growing a-pace but that pace has begun to ease and rising costs are pointing to elevated risks in the medium term.
-US housing starts growth easing
-Wage and raw material costs rising
-Finance costs rising
By Greg Peel
US housing starts continued to grow solidly in April, with single family home starts rising 7.2% and multi-family (apartment) starts rising 13.3%. However, both numbers represent an easing from earlier rates of growth, ANZ Bank economists note. Total April starts came in at 1287k (seasonally adjusted) compared to a March quarter average of 1336k.
The US economy is travelling well and consumer confidence is high, driven by a tight labour market, rising wages, lower taxes and robust financial markets. Unemployment below 4% is either at or close to “full employment”. In response, inflation is normalising and the Fed is raising rates. Strong consumer confidence and low unemployment suggest housing starts still have more room to run to the upside, ANZ notes.
But there are structural headwinds looming.
Household formation has been in a slight downtrend for a number of years in line with the ageing population. Yet household formation rates for younger Americans are also in a downtrend.
ANZ suggests this is because of a rise in debt for young adults, mostly from student loans, car loans and credit cards. Student loans in particular are weighing on youth debt, as both loan per student is rising and the number of students is rising.
Rising Costs
The cost of building a new house in the US is rising rapidly and looks set to rise further.
Job openings in the construction industry are at the highest level since 2007, ANZ notes, suggesting construction employment will continue to tighten, flowing to upside in wages.
On top of fewer private sector construction workers being available, Trump’s planned upshift in infrastructure spending is likely to crowd out employment in the private sector. Public spending on construction is now growing faster than private sector spending for the first time since the GFC.
At the same time, raw material costs are beginning to rise sharply. Average price growth for lumber, oil, copper and aluminium is at multi-year highs. The price of a new home will have to rise to absorb these costs, which are rising at a faster pace than wages.
Borrowing Costs
The Fed is in a tightening cycle, meaning US bond yields are rising. A typical US mortgage is for thirty years and is priced directly off the thirty-year bond rate. The rate on a thirty year mortgage is now 4.6%, ANZ notes, compared to 3.8% at end-2017 and 3.4% at end-2016.
Weekly new mortgage applications have been net negative for seven of the past eight weeks.
Rates are rising across the yield curve, meaning higher rates for not just mortgages but for all forms of household from car loans to credit cards and of course, student loans.
Housing affordability is now becoming an issue for Americans, and for them it is a novel experience.
ANZ’s economists expect the housing sector to continue to contribute to US economic growth over the next few quarters but acceleration in housing starts is beginning to ease and risks are becoming elevated, for all the reasons detailed above.
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