January 6, 2020
A large number of builders have their own lenders, or ties to certain lenders. Yet a portion of Orion’s business, due to our pricing and programs, comes from brokers working with certain builders. What is going on with builders, and is it indicative of the general lending environment?
First some statistics. It seems homebuilders can finally be happy, or at least happy about budding momentum in the sector. The outlook has improved for both single-family and multifamily, as housing starts easily beat expectations in November and starts for October were revised higher. Overall starts rose 3.2 percent in the second strongest reading since 2007, while single-family starts rose 2.4 percent, the fifth rise in the past six months, and multifamily starts rose 4.9 percent, following an 11.8 percent rise in October. Those housing figures should not only contribute positively to Q4 GDP growth and offset some of the weakness in capital spending, but position housing as one of the bright spots in the 2020 economic outlook.
As good as the data has been of late, overall starts still trail permits by a wide margin. Permits, which are less volatile and tend to lead starts by a month or two, rose to the highest in 12 years. The bulk of the gap between starts and permits is in apartment construction, though a relatively large proportion of homes are started the very same month a permit is issued. The current gap between permits and starts likely reflects what Orion’s AEs are seeing: concerns about overbuilding in some submarkets, soaring construction costs, and the lack of construction workers.
Even with high demand for apartments and economic-cycle low vacancy rates, the overhang in permits creates some upside risk to housing starts going forward. Starts were beaten down a year ago when interest rates spiked toward the end of the year. The Fed’s pivot toward lower rates eventually engendered a rebound, after builders rid themselves of inventories and began to focus more on entry-level housing. Orion’s AEs say their brokers agree that the biggest hurdles for builders going forward are securing affordable well-located lots and construction workers, but it seems homebuilders finally have the wind at their backs.