The 5.5% fall in May’s housing starts was significantly worse than the anticipated 4.1% increase. On an annual basis, the volatile starts are now just 2.4% lower than a year ago. This decrease follows downward revisions to both April and March. The decrease in starts was largely (but not entirely) in the multifamily units, which fell by 9.8%, whereas single-family starts fell by 3.9%. The level of starts in May was 1,092,000. Since 1947, the median monthly reading in housing starts has been 1.46 million. Meanwhile, building permits fell by 4.9%, to 1,168,000, which is 0.8% lower than 12 months earlier.
Regionally, the pattern of housing starts activity shows that the weakness was fairly mixed: down 8.8% in the South and 9.2% in the Midwest, flat in the Northeast, and up 1.3% in the West.
According to the latest NAHB homebuilders’ survey for June, building activity was again very solid in the month, but slightly less so than in May. The sentiment index moved down to 67 from 70; this is a historically strong reading (50 is the dividing line between viewing conditions as good or poor). The NAHB stated: “Builder confidence levels have remained consistently sound this year, reflecting the ongoing gradual recovery of the housing market.” “As the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family sector.”
While this was the third straight month of weakness in housing starts and it will act as a drag on GDP, we still feel as though much of the weakness is supply related (lack of available lots to build on and a shortage of skilled construction workers, as continues to be mentioned by the NAHB), rather than a sharp decline in demand. We can also see this in the ongoing strength in mortgage applications (which show no signs of rolling over) as well as in the very low level of inventories for existing homes. This lack of existing home inventory should be forcing consumers to increasingly shift toward relatively higher-priced new homes. We would also note that the forefront of the millennial generation is only now just starting to enter their prime homebuying ages. Bottom line, this weakness is a concern; it will act as a drag on economic activity given the high multiplier impact on the rest of the economy, but it still seems to relate more to supply issues rather than collapsing consumer demand for homes.
Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.