The 5.8% decrease in August’s housing starts was much more than the anticipated 1.7% decrease (largest fall since 8.2% in March). On an annual basis, the volatile starts are now just 0.9% higher than a year ago. The last-three-months’ starts rose by an average of 0.5% following a 1.7% increase for this metric in July. The monthly decrease in total starts was due to weakness in both multifamily homes, which fell by 6.9% after a 4.6% rise, and single-family starts, which fell by a similar by 6.0% following a 0.7% increase. Multifamily starts are now 2.3% higher than a year ago, while single-family starts are 1.2% lower than last year. Starts in August were still above the 1 million mark, at 1,142,000. Since 1947, the median monthly reading in housing starts has been 1.46 million. Meanwhile, building permits fell by 0.4%, to 1,139,000—2.3% lower than 12 months earlier; they had been expected to rise by 1.8% in the month.
Regionally, the pattern of housing starts activity again shows that all of the weakness took place in the South: starts fell by 14.8% in the South, but rose by 1.8% in the West, 5.6% in the Midwest, and 7.6% in the Northeast.
According to the latest NAHB homebuilders’ survey for September, building activity was very strong in the month. The sentiment index rose to 65 in September, after 59 in August (50 is the dividing line between viewing conditions as good or poor). The NAHB stated: “As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers, a positive sign that the housing market continues to move forward.” “The single-family market continues to make gradual gains and we expect this upward momentum will build throughout the remainder of the year and into 2017.” “With the inventory of new and existing homes remaining tight, builders are confident that if they can build more homes they can sell them.” “Though solid job creation and low interest rates are also fueling demand, builders continue to be hampered by supply-side constraints that include shortages of labor and lots.”
This report for August was disappointing but seems to be more noise than signal. All of the weakness came from the South, whereas the rest of the country actually experienced relatively solid increases. Furthermore, as mentioned above, the homebuilders are once again experiencing extremely high levels of confidence, which surged in September on the back of solid demand and tight inventories. The reality here is that the level of starts is still well below the level needed to support the existing population and demographic trends. Demand continues to improve on the back of further gains in employment, income, and confidence, while supply is being constricted (according to the homebuilders) by a lack of available lots to build on, in addition to a slower approvals rate for building permits due to increased regulation around new builds. There is no question that as the baby boomers retire they are downsizing and demand for flats and existing homes has been relatively greater than that for new homes. However, as the millennials age and the employment situation continues to improve, we are already starting to see demand grow for this segment of the market. In general, despite this weakness in August, the fundamentals around a housing recovery remain solid.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.