The 3.0% rise in February’s housing starts was a little more than the anticipated 1.4% increase. On an annual basis, the volatile starts are now 6.2% higher than a year ago. This increase follows a decline of 1.9% in January and an 11.0% rise in December. The increase in starts was entirely in the single-family home area, which rose 6.5%; however, multifamily starts were lower by 7.7%. Multifamily starts are now 11.2% higher than a year ago, while single-family starts are 3.2% higher than last year. The level of starts in February was 1,288,000. Since 1947, the median monthly reading in housing starts has been 1.46 million. Meanwhile, building permits dropped by 6.2%, to 1,213,000, which is 4.4% higher than 12 months earlier; they had been expected to fall by 1.9% in the month.
Regionally, the pattern of housing starts activity shows that the strength was focused entirely in the West, where starts increased by 35.7%; meanwhile, they were down 9.8% in the Northeast, 4.6% in the Midwest, and 3.8% in the South.
According to the latest NAHB homebuilders’ survey for March, building activity was again very solid in the month. The sentiment index jumped to 71, after 65 in February; this is the highest since June 2005 (50 is the dividing line between viewing conditions as good or poor). The NAHB stated: “Builders are buoyed by President Trump’s actions on regulatory reform, particularly his recent executive order to rescind or revise the waters of the U.S. rule that impacts permitting.” “While builders are clearly confident, we expect some moderation in the index moving forward.” “Builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.”
The sharp increase in homebuilders’ sentiment is just another of the ‘softer’ economic survey data reports that have increased quite dramatically following the Trump election. The homebuilders are exceedingly buoyant about the potential for less regulation. Following the last financial crisis, regulation for the housing sector has increased significantly and has been a major hinderance to permit issuance. To the extent that much of the weakness seen in building permits has not so much been due to a lack of demand but instead a shortage of capacity for permit issuers who are faced with a longer list of regulations that must be ticked off before the permit can be issued, this now means the process is much longer. The good news here is that the ‘harder’ economic data, in the form of housing starts and actual demand for homes, is slowly, but solidly increasing. Looking forward, with interest rates now moving upward and prices rising, affordability is starting to come down, but the market is far from becoming unstuck, particularly when inventories are still tight and underlying consumer fundamentals are still quite solid. In short, the housing sector should continue to do well this year.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.