The 6.8% fall in March’s housing starts was much greater than the anticipated 3.0% decrease. On an annual basis, the volatile starts are now 9.2% higher than a year ago. This increase follows an upwardly revised 5.0% in February and a 2.7% fall in January. The decrease in starts was spread between the single-family home area, which fell by 6.2%, and the multifamily starts which were lower by 6.1%. Multifamily starts are now 9.1% higher than a year ago, while single-family starts are 9.3% higher than last year. The level of starts in March was 1,215,000. Since 1947, the median monthly reading in housing starts has been 1.46 million. Meanwhile, building permits rose by 3.6%, to 1,260,000, which is 17.0% higher than 12 months earlier.
Regionally, the pattern of housing starts activity shows that the weakness was broadly focused: down 16.2% in the Midwest, 16.0% in the West, and 2.9% in the South; though they did increase by 12.9% in the Northeast.
According to the latest NAHB homebuilders’ survey for April, building activity was again very solid in the month. The sentiment index did, however, slip to 68, after 71 in March; this is still a historically very strong reading (50 is the dividing line between viewing conditions as good or poor). The NAHB stated: “Even with this month’s modest drop, builder confidence is on very firm ground, and builders are reporting strong interest among potential home buyers.” “The fact that the HMI measure of current sales conditions has been over 70 for five consecutive months shows that there is continued demand for new construction. However, builders are facing several challenges, such as hefty regulatory costs and ongoing increases in building material prices.”
Following the election, the homebuilders have been exceedingly buoyant about the potential for less regulation, something which President Trump can change without the need for congressional approval. Much of the increased regulation is the result of the last financial crisis and has been a major hinderance to permit issuance, significantly increasing the time to issuance. 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 of permit issuers who are faced with a longer list of regulations that must be ticked off before the permit can be issued. 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. In terms of inventory levels, the picture is a little mixed, with inventory of existing homes now extremely low, though that for new homes is relatively elevated. Looking forward, with interest rates still low, but expected to moderately increase, and prices rising, affordability is starting to come down; however, consumer fundamentals and demand 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.