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REI Newsletter

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01: Housing Starts Deep Dive

Hey 👋,

Welcome to the first issue of the REI Newsletter. I am glad you are here.

I was recently listening to the BiggerPockets podcast and they were talking about housing starts again. It's well known that the US is behind on housing starts coming out of the great recession and the obvious slow down with COVID. We all know about what happened with the price of lumber recently and how that set us behind even further.

But that got me thinking 🤔.

• * Who tracks housing starts?
• * How do they define a housing start?
• * How many have we "started" in 2021?
• * How many should we have started in 2021?
• * Are we on track for 2022?

I researched these answers and more and summarize them below.

Housing Starts

The graph above comes from FRED (Federal Reserve Bank of St. Louis). They provide economic data that real estate investors (and others) use for reports. It is important to know that you can slice and dice this information 100 ways to Sunday. The graph above shows UNITS. So this is both single-family and multi-family starts. If someone is building a 50 unit apartment that would count as 50 starts. Some data you will find in news reports or blog posts will talk about single-family homes and multi-unit in different ways.

Where does the data come from?

"As provided by the Census, start occurs when excavation begins for the footings or foundation of a building. All housing units in a multifamily building are defined as being started when this excavation begins. Beginning with data for September 1992, estimates of housing starts include units in structures being totally rebuilt on an existing foundation."

We have a couple of answers to our initial questions. But let's go deeper.

Doesn't the census come out every 10 years? How do they keep us up to date with housing starts monthly?

"At the midpoint of each month, the U.S. Census Bureau and the Department of Housing and Urban Development jointly announce residential construction statistics for the prior month. The report includes figures on housing starts, building permits, and housing completions. It is one of the more closely watched surveys issued monthly, as housing is seen as critical to sustaining any economic expansion."

Okay got it, so how many of these starts are we seeing in 2021?

Here are the year-to-date housing starts (remember we are talking housing units).

• * August 2021 - 1,615,000 starts
• * July 2021 - 1,554,000 starts
• * June 2021 - 1,657,000 starts
• * May 2021 - 1,594,000 starts
• * April 2021 - 1,514,000 starts
• * March 2021 - 1,725,000 starts
• * February 2021 - 1,447,000
• * January 2021 - 1,625,000

If you are like me, you are probably pulling out your calculator to average out these numbers. I will save you some time...

Average monthly housing starts = 1,591,000

How Many Housing Starts Do We Need?

It would appear the census bureau simply reports what happened and does not make a projection or prediction on what the economy needs (makes sense).

However, there are plenty of others who are willing to pick up the crystal ball and tell us what they think.

For instance, "Realtors estimate that single-family housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to close the inventory gap." - source .

We are close to the range of what some experts think we need to have supply catch up to demand. But this will need to sustain to catch up from the drop in 2009-2019 and the drop caused by COVID.

TL;DR supply is still catching up to demand.

What does this mean for real estate investors?

We are seeing several macro-economic events happening at the same time. Housing starts are trying to put more supply into the economy to match demand. If we continue to add more and more supply, the price of houses should help cool off this white-hot real estate market. But don't expect that any time soon. The data would suggest we are going to finish the year with supply still being behind and a good portion of the 2022 year needing more supply.

Construction crews. Most construction companies are looking for employees to help catch up to demand. As long as construction companies can find and retain talent, they will be able to continue building houses.

Landlords will have more options to offer tenants looking to rent. This will make the ultra-competitive rent situation more normalized. But there is a lag between housing starts, completed houses, and tenants being able to move in. So expect competitive rents through the first half of 2022.

Remote work is allowing people (specifically younger people) to start looking for affordable homes. They are interested in buying vs renting when the market can offer affordable houses.

There are opportunities everywhere you look. Here are a couple of situations you should consider.

1. 1. Homeowners in older homes ( > 1970) could be looking to move into a newer home which is an opportunity for wholesalers and flippers.
2. 2. Buy and hold investors should be looking for markets where people are migrating to work from home. Purchase SFH and turn them into cash-flowing properties.
3. 3. Your ARVs and wholesale margins could become compressed as more inventory hits the market. Keep a close eye on housing starts and price your deals accordingly.
4. 4. Multifamily starts are on the rise. Finding older multifamily that needs work could be a great strategy to handle the inflow of investors looking to upgrade and go upmarket.

More Interesting Data Points

These are US based data points

• * 30 Year Mortgage Rate - 2.86%
• * US Building Permits MoM - 6.01%
• * US Existing Home Sales MoM -2.00%
• * US Home Ownership Rate - 65.40%
• * US Home Vacancy Rate - 0.90%
• * US New Single-Family Houses Sold - 740.00K
• * US Pending Home Sales YoY -8.51%
• * US Rental Vacancy Rate - 6.20%

Source