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    Underfinanced: US Housing Starts Drop in November Amid Sky-High Prices

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    The US housing market is mired in systemic weakness, caused by a combination of financing and refi implications, higher interest rates, declining consumer demand, low household incomes and high levels of indebtedness, while home prices are prohibitively high.

    Kristian Rouz – The number of new residential construction sites fell short of expectations in November as the Federal Reserve’s tightening cycle and rising delinquencies in commercial mortgage-backed securities impaired financing prospects for this type of construction.

    Meanwhile, with home prices having robustly advanced in the past several years, the market is showing signs of peaking out as demand in wearing off: with higher mortgage rates, many potential homebuyers are diverted into renting.

    Housing market dynamics suggest slower economic growth in the US in 4Q16 compared to the annualized pace of expansion at 2.9pc in the third quarter. Even though the number of issued construction permits is still encouraging, the figure does not always translate into a larger amount of housing starts in the short-term outlook: the squeeze in financing is poised to continue.

    US homebuilding retreated from its nine-year highest in November, with housing starts totalling 1.09 mln compared to the 1.23 mln expected earlier. Groundbreaking slumped by 18.2pc, according to a report by Commerce Department released on Friday. In October, housing starts hit their highest since mid-2007, at 1.34 mln.

    "The economy won't be flying as high without new construction that leads to additional consumer purchases of furniture and appliances and cars. The economy has some risks to the downside," Chris Rupkey of New York-based MUFG Union Bank said.

    While the demand for single-family homes is cooling amidst the still-low interest rates, the Fed’s plan to undertake another three hikes in borrowing costs in 2017 is poised to contribute to an even slower expansion in construction. With base interest rates currently at 0.5-0.75pc, 30-year mortgage rates averaged at 4.65pc on Friday, compared to that of 3.60pc in July-August this year.

    National average refi rates were slightly lower, at 4.23pc, but even at this ultra-accommodative level refinancing of 10-year debt expiring in 2017 might be a problem due to the high levels of household indebtedness, loan delinquencies and non-performing loans (NPLs) mounting.

    Part of the problem is the lingering wage stagnation, hampering households’ ability to improve the quality of their debt servicing. Another issue is, paradoxically, that the past eight years of the Fed’s ultra-expansionary monetary policies have resulted in high affordability of credit, and consumers going into credit card debt without fully realising their servicing capabilities.

    Therefore, the housing market is increasingly vulnerable facing the current macroeconomic trends. Multi-family starts crashed by 45.1pc in November. Building permits dropped 13.0pc.

    Single-family housing starts dropped 4.1pc to 828,000 in November. This type of construction hit its record highest in 2006 at 1.82 mln per month, when the US economy was rapidly growing in the housing bubble and the uncontrolled expansion of consumer and mortgage credit.

    In November, single-family permits issuance rose 0.5pc to 778,000, their highest since late 2007, suggesting some strength to the market. However, not all these permits will necessarily translate into actual housing starts due to financing and refi complication and weakening consumer demand for mortgage and housing in many parts of the US.  Besides, the amount of permits issues is still below the lacklustre level of single-family groundbreaking, which is hardly encouraging.

    The weakness in residential construction has been slashing percentage points off US GDP since 2Q16. Yet, there is still come optimism in the markets.

    The National Association of Realtors (NAR) reported accelerated existing-home sales to their quickest in roughly a decade albeit price growth has outpaced gains in incomes.

    "The trends in the single-family data still appear to be moving higher over time, which is a favourable signal regarding upcoming single-family construction activity," Daniel Silver of New York-based JPMorgan said.

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