Harper: Housing Starts Drop, But Numbers Misleading

Oct 20, 2016

In this week’s Economic Report, Dr. Rick Harper discusses an unexpected drop in housing starts in September and what it means for the larger economic landscape. Also, the SBDC released its first Florida Small Business Survey.

Housing starts for September were down 9 percent from August and down 12 percent from September 2015, but Harper said digging deeper into the numbers from the Commerce Department’s monthly report reveals a really mixed bag.

Credit Michael Spooneybarger/ CREO

“For single family home starts, the report was quite good – up 8.1 percent,” Harper said. “It was construction of apartments – multi-family dwelling units – that fell by 38 percent, and as you look at the history of that data series, there is a lot of volatility. Multi-family starts tend to be more volatile, and changes will show up as magnified in that sense.”

The overall housing picture is still relatively good, Harper said.

“The rate of increase of spending has slowed. We had been running at a 5-10 percent annualized rate of increase in construction spending,” Harper said. “Across the nation when you look at both residential and commercial over the last several quarters, it’s dropped down to the 2-3 percent range. It’s clear that construction overall is slowing down, but single family homes continue to be good, and that’s driven largely by low interest rates.”

The current low interest rates allow mortgage borrowers to get more money from lenders with less cost in interest payments later.

“Most people ask their mortgage lender, ‘How much house can I buy given what interest rates are and my income?’” Harper said. “That’s driven home prices up because when interest rates are so low, that means that you can borrow a $1,000 for less interest expense, which means you can buy more home.”

The South was a bright spot in the report with housing starts jumping 12 percent. In Florida, there’s a housing shortage, Harper said.

“Who thought five years ago we’d be saying there’s a shortage of inventory in major market areas such as Miami? Five years ago, we were talking about 40,000 excess inventory in condos and two decades to wipe that off of the balance sheets of the sellers,” Harper said. “However, it’s picked up in the last several years with a number of new projects going in and so what we see is that prices have recovered across the U.S. to pre-crash levels.”

Harper said that while Florida is lagging a little behind, growth is still strong in the state, and the outlook is positive.

“The outlook continues to be good,” Harper said. “It’s likely that the Fed will hold interest rates low for an extended period of time and if they do that, then it will continue to be cheap to finance houses and that’s where American consumers incur most of their debt. The housing market should remain strong even with signs of slowing.”

The Consumer Price Index rose 0.3 percent in September, and Harper said it’s a welcome increase.

“We’ve been needing the Consumer Price Index to rise,” Harper said. “This is what the Fed has been waiting for –  some sign of inflation, some sign that we are no longer at risk of falling into that deflation pit and stagnation that has plagued Japan for several decades.”

The Fed have been expected to raise interest rates by the end of the year, and this is another indication that the time is right, Harper said.

“This is a sign that should raise the probabilities that the Fed will raise interest rates,” Harper said. “Perhaps not in November so close to the election, but certainly at their December meeting, we can expect to see an interest rate increase.”

The statewide Florida SBDC, which is headquartered at UWF, released the results of its inaugural Florida Small Business Confidence Index this week. The survey found that uncertainty was the number one issue that small businesses identified as a major concern, but a majority also reported being optimistic about their economic future.

“Eighty-six percent indicated they expected sales to increase in the next year,” Harper said. “Expectations are high, and there is some uncertainty lingering, but all-in-all, great news. And the SBDC has gotten this study out there, and they are continuing to do it quarterly. It will be interesting to see how that index develops.”

Dr. Rick Harper serves as associate vice president for research and economic opportunity at the University of West Florida and oversees the University’s Center for Research and Economic Opportunity. He can be reached at rharper@uwf.com. CREO staff writer Mike Ensley contributed to this report. He can be reached at kensley@uwf.edu.

This article is part of a collaboration between WUWF and the UWF Center for Research and Economic Opportunity.