Housing Starts Beat Expectations, But The Gain Comes With Caveats

Residential construction picked up last month, according to the US Census Bureau. Housing starts beat expectations and increased to an annualized rate of 1.072 million units on a seasonally adjusted basis—the most since last November. More permits were issued last month as well: 1.080 million (annualized) in May, the highest number since the recession ended in mid-2009. The monthly gain delivered a dramatic boost to the year-over-year in comparison for starts, which increased more than 26% last month vs. a year earlier. That’s the strongest annual rate since last November. Permits, however, slumped a bit in the annual comparison, decelerating to a slim 3.9% advance.

Despite the good news in today’s release, the weaker year-over-year trend in permits is worrisome. As you can see in the chart below, gravity still seems to have a grip on plans for new construction (black line). The sharp rise in building activity paints a considerably brighter picture, but the wide divergence at the moment between starts and permits on a rolling 12-month basis leaves plenty of room for caution. One of these data sets is misleading us.


Only time will sort out the mixed message. Meantime, it looks like we dodged a bullet. The disappointing news for home sales in recent months has cast a shadow over the outlook for housing. Today’s report suggests that the sector may be stabilizing. But even if April’s strong rebound in starts is a reliable benchmark, the macro benefits may be increasingly light going forward.

Consider that growth in the single-family corner of new construction was tepid last month, advancing a thin 0.8% vs. the previous month. That’s a sore spot if it continues. Quite a lot of the economic growth that comes from an expanding housing sector is bound up with single-family units. That’s because new construction and purchases of the traditional family home triggers significantly more economic activity vs. multi-family units.

“The headlines look great but all the action is in the hyper-volatile multi-family components,” notes Ian Shepherdson at Pantheon Macroeconomics. “The multi-family trend is rising, by contrast, reflecting strong rental demand, though the April number overstates the underlying pace and will partly correct in May.”

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