2015 hasn’t been a great year for economic data. After the most recent number on the U.S. Trade deficits, most economists expect that the economy actually shrank in the first quarter of this year, following decelerating growth in the fourth quarter of last year.
Analysts expected that a revived construction and housing market would offer a much-needed tailwind to the economy. But, as I pointed out in March, while home prices have recovered to their pre-bubble levels, household formations and the number of residential construction projects underway have remained subdued.
That looks like it could be changing. On Tuesday, the Census Bureau announced that 1,135,000 units of new, privately owned residential construction projects were launched in April, up 20.2% from March and 9.2% higher than last year. It’s also the highest reading since November 2007.
Patrick Newport and Stephanie Karol, economists at IHS Global Insights, wrote in an analyst note that the steady increase over the past year in new home sales has helped builders get “more favorable credit conditions,” as evidenced by the most recent Fed Senior Loan Officers’ Survey. Another factor behind the surge in starts has been cheap lumber, which “has been dropping like a stone since February,” Newport and Carol write.
But without a surge in demand for new homes, builders would not have the market to absorb this ramped up production. The most recent jobs report showed that roughly 20% of the new jobs created last month were in the construction sector, which could be related to the recent surge in household formations, according to the most recent data from the Census Department’s Household Vacancies and Homeownership report:
US Household Formation data by YCharts
During the recession, the number of Americans leaving home to start their own households fell dramatically, despite continued population growth. Economists have for years expected this pent-up demand to unleash itself on the housing market, creating good paying jobs and a virtuous cycle of growth. One shouldn’t draw any conclusion from a single month of data, but today’s housing starts numbers suggest we may be headed in that direction.