This week the National Association of Home Builders reported improved confidence and business conditions among new home builders. With the big drop in mortgage interest rates, builders have been enjoying solid sales so far in 2019. NAHB chairman, Greg Ugalde, even said as much…

“Builders are busy catching up after a wet winter and many characterize sales as solid, driven by improved demand and ongoing low overall supply…However, affordability challenges persist and remain a big impediment to stronger sales.”

With mortgage rates just above 4 percent, the year-over-year interest rate comparisons are very favorable for home builders. Both March and April saw rates lower than at the same time in 2018. May will mark the third month in a row for a favorable interest rate environment. With this dynamic in place amid of the longest economic expansions in American history, you might expect new homes to be flying off the shelf, but they aren’t.

What is happening instead is that home builders are carefully managing their inventory levels and working off some of the inventory which built up going into the fourth quarter of 2018. The April starts and permits data showed some improvement over February and March, which should be expected. Yes, housing starts increased to a seasonally adjusted annual rate of 1.235 million in April, but single-family permits and starts were still lower than last year. Single family starts were down 4.3 percent last year. Permits were even weaker, lower by 9.4 percent compared to April of 2018.

Single-family completions were up by an impressive 16.6 percent in April, a sign that builders were allocating efforts at getting some of that product out the door while the iron is hot. Single-family homes under construction in April rose by a modest 1.7 percent compared to the same time a year ago. As you move down the product chain to the origination phase of the process (aka permits), builders are still reluctant to put their money where their mouth is. This what the permits data is showing.

Recent numbers from the National Center for Health Statistics show that the birthrate for Americans is the lowest in 32 years. Fewer births means less migration and relocation, and consequently less GDP growth. It also means less demand for new homes. With so many millennials scraping to get by, it is no surprise builders are being cautious. Many millennials can’t afford the new homes builders want to sell, so why would they be having children.

After causing massive wealth inequality with trickle-down monetary policy, it is rather ironic Federal Reserve officials are now warning that rising wealth inequality is threatening long-term growth prospects in the United States. Just a thought, but maybe the carnival barkers at the Fed should have thought about this BEFORE they shoved $29 trillion in virtually interest free loans at Wall Street following the Great Recession.

Recent data from the New York Fed show that auto-loan delinquencies which are 90 days or more late have jumped to 4.69% of the outstanding loans in Q1. This puts the delinquency rate for auto loans near levels seen in 2009 following the Great Recession. Apparently flyover country isn’t coping well with even the modest increase in the Fed Funds rate of only 2.5%. U.S. consumers are already struggling, so the Fed can’t even talk about raising rates or fully normalizing the balance sheet unless they want to unleash Armageddon in the stock market.

U.S. home builders are likely aware of this development, so they aren’t going to stick their neck out by putting too many spec (inventory) homes on the ground.

US Personal Interest Payments April 2019

“Though this be madness, yet there is a method in it.” Shakespeare – Hamlet