Anxieties Rise as Housing Starts and Permits Fall

Published On
May 1, 2017

According to the latest data from the Census Bureau and the Department of Housing and Urban Development, new home construction and building permits fell in April, but this drop doesn't really tell the whole story of what is going on in the residential homebuilding market.

Residential starts fell 2.6 percent to a 1.17 million annualized rate (compared with a forecast of 1.26 million), the lowest since November. Permits decreased 2.5 percent to 1.23 million annualized (compared with a forecast of 1.27 million). In addition, April represented the second straight month of decline (with starts falling 6.6 percent in March), pushing starts and permits to the lowest level in five months.

While construction of single-family homes edged up a slight 0.4 percent (to an annual rate of 835,000 units), what really caused the overall decline was the precipitous 9.2 percent drop in multifamily construction (to an annual rate of 337,000 units).

Geography also played a role in the mixed data. While the Midwest saw a 41.1 percent overall increase, and the West saw a 5.4 percent increase, the South experienced a 9.1 percent decrease, and the Northeast experienced a whopping 37.3 percent decrease.

However, while starts and permits decreased, most indicators show that housing demand remains healthy. In fact, compared to an overall growth in the economy of just 0.7 percent, the housing sector experienced a strong 13.7 percent growth rate. The National Association of Home Builders/Wells Fargo builder index rose to 70 in May, up two points from April's 68 reading. (Any reading about 50 indicates that builders view sales and conditions as "good.") In addition, homebuyer confidence is at its second-highest level since 2005.

As a result, most analysts believe the recent "starts and permits" data is a blip, and that they will rebound. Most analysts believe the overall strengthening economy, strong employment gains, and low unemployment will continue to fuel demand.

"We should keep in mind that several other housing indicators have been upbeat lately, and also that we previously have seen some temporary soft patches in the permits data that did not derail the housing recovery," said Daniel Silver, an economist with JPMorgan, in an interview with Fox News.

"We expect a clear rebound over the next few months," said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a recent Bloomberg News interview.

However, the low unemployment rate that is helping to fuel demand might be a double-edged sword and actually explain the disparity between decreasing starts/permits and increasing demand. That is, with starts and permits decreasing and demand increasing, demand is outstripping supply.

Why is this the case? Part of the slowdown in starts and permits might be weather-related, especially due to the harsh winter in the Northeast. However, many analysts also believe that the low unemployment rate (a 10-year low of 4.4 percent) has been the major factor in the worsening labor shortage being experienced by the construction industry. In other words, customers are wanting homes. However, builders simply cannot find enough workers to build them.

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