Home builders shocked the Real Estate Market by reporting a record 21% increase in new housing starts in May. Is this the signal of a Housing recovery, or an even bigger Home Builder Bubble?
Home Builders just shocked everyone in the housing market by registering a record increase in home building last month, with annualized housing starts surging to 1.63 million in May 2023, a massive 21% increase from the previous month.
Such a dramatic increase in housing starts suggests that home builders and apartment developers are feeling more optimistic about a recovery in the US Housing Market in 2023. Bullish sentiment that is shared by the stock market, with investors piling into home builder stocks and pushing their prices up to the highest level on record.
But is this a false optimism? Builders are deciding to ramp up production at a time when traffic at their homebuilding sites is still down 35% from pre-pandemic levels. Moreover, economic indicators are still forecasting a worsening recession in 2023 just as Jerome Powell and the Federal Reserve are increasing their resolve to keep interest and mortgage rates elevated.
Ultimately this move increase housing starts could end up badly for builders, and good for homebuyers and renters. In this post I will breakdown the data on the recent surge in housing starts, its impact on home builder stock prices, and where I think the market will go for the rest of 2023 and into 2024.
Single-Family Home Construction spikes 19%
The big surprise in the May 2023 Housing Starts report from the US Census Bureau came from single-family home builders, who broke ground on 997,000 houses on an annualized basis.
These 997,000 starts for single-family homes were up 19% from the last month, reversing a steady downward trend in building that occurred over the last year since the Fed began their interest rate hike regime. This increase in starts is welcome news for single-family homebuyers, who will likely see more new homes offered for sale from builders in future months.
The other surprise in the report is that apartment developers also got very aggressive in May 2023, breaking ground on 624k multifamily and condo units, a level of building that was up 28% from the previous month. The level of new apartment construction May was so great that it actually set a record going back to 1997.
Suggesting that the slow-motion rental crash in America is will likely continue, with data from Apartment List already showing that the apartment vacancy rate has skyrocketed to 7% over the last year. Those rental vacancy rates will likely continue to increase over the next year with all the new construction, putting more downward pressure on rents (which should eventually filter through to home prices).
In aggregate, these new starts will add to the pile-up of building that is already ongoing, with 1.1 million apartment units currently in the construction backlog to go along with 840k single-family homes. These combined 2.0 million units currently in construction or permitting is the highest level of all-time.
Home Builder stocks are ripping. Is it a Bubble?
In response to the increase in housing starts, as well as several months of increasing new home sales, home builder stocks continue to rip higher.
For instance, DR Horton, the largest builder in America, has seen their stock price vault by 93% over the last year and 191% over the last five years. Their stock is now trading at its highest level of all-time, even higher than the pandemic peak that occurred in late 2021.
As I've covered numerous times, here and on YouTube, I believe this rally in home builder stock prices is a potential bubble driven by unfounded optimistic sentiment. Most notably, investors and builders alike are getting jazzed about the fact that over the last several months new home sales have increased to an annualized rate of 683,000.
Posted by:
Nick Gerli
June 21, 2023
