Housing Starts Disappoint as Builders Grapple With Rising Costs

Although they were up slightly compared with June, housing starts came in below forecasts for a third month in a row in July, leaving many wondering whether there is any solution to the inventory shortage that is holding back both new and existing-home sales.

According to estimates released by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts in July were at an adjusted annual rate of about 1.168 million, an increase of 0.9% compared with a revised rate of 1.158 million in June but down 1.4% from 1.185 million in July 2017.

Starts of single-family homes were at an annual rate of 862,000, an increase of 0.9% compared with about 854,000 in June.

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Starts of multifamily residences (five units or more per building) were at a rate of 303,000, up 3.1% compared with 294,000 in June.

Regionally, combined single- and multifamily housing starts in July rose 11.6% in the Midwest and 10.4% in the South. However, starts fell 4% in the Northeast and plummeted 19.6% in the West due to affordability constraints in the coastal markets.

Building permits were at an annual rate of 1.311 million, an increase of 1.5% compared with a revised 1.292 million in June and up 4.2% compared with 1.258 million in July 2017.

Permits for single-family homes were at a rate of 869,000, an increase of 1.9% compared with a revised 853,000 in June.

Permits for multifamily dwellings were at a rate of 410,000, an increase of 1.7% compared with 403,000 in June.

Regionally, permits increased 5.9% in the Northeast, 5.8% in the Midwest and 1.2% in the West, but were down 0.3% in the South.

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Housing completions were at a rate of 1.188 million, a decrease of 1.7% compared with 1.209 million in June and 0.8% below the rate of 1.197 million seen in July 2017.

“Builder confidence remains solid, although it has fallen back somewhat in recent months due to rising construction costs in 2018, including lumber,” says Randy Noel, chairman of the National Association of Home Builders (NAHB), in a statement. “As builders grapple with higher costs, one positive development is that lumber prices have shown signs of easing the past two months off their record high levels posted in June.”

According to NAHB, cost concerns are causing some projects to be delayed. The number of single-family units authorized but not started has increased 25% since July 2017.

“Supply-side challenges including increases in material prices and chronic labor shortages are affecting affordability in many markets,” says Robert Dietz, chief economist for NAHB. “However, consumer demand remains strong due to a growing economy and job market and favorable demographics. Moreover, on a year-to-date basis, single-family construction has shown steady progress, up 7.2 percent, while multifamily production is up 3.4 percent as well.”

Mark Fleming, chief economist for First American, says the slight increase in housing starts and building permits is a welcome sign.

“Home buyers looking for more housing supply to choose from can take heart, as the Census Bureau report on housing construction showed builders are starting work on additional housing, inching closer to balancing inventory with demand,” Fleming says in a statement.

“Despite significant cost headwinds, home builders are pushing through new construction projects,” Fleming says. “In fact, residential building permits increased 4.2 percent since this time last year. Permits for single-family homes increased 1.9 percent compared to the previous month, the largest monthly gain since October of 2017.”

Fleming says the increase in permits, despite falling short of forecasts, “is a welcome sign as a strong economy with continuing job and income growth, millennials aging into homeownership, and baby boomers living longer and more independently than ever, will continue to drive demand and keep the pressure up on the housing market.”

Housing starts collapsed in June, falling 12.3% month-over-month and 4.2% year-over-year.

In May, housing starts increased 5.0% month-over-month but permits fell 4.6%.

The critical factor is not whether permits are increasing on a month-over-month basis but rather if they are keeping up with demand, which is based, in part, on population growth.

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