The Census Bureau and the U.S. Department of Housing and Urban Development said that housing starts and permits were higher in July, but the overall data were below consensus expectations. After peaking at just over one million annualized starts in March, new residential construction has been weaker since. New housing starts rose from 846,000 in June to 896,000 in July. The good news is that these figures are 20.9 percent higher than 12 months ago.
Yet, despite the increase in July, it is also clear that the jump in borrowing costs is beginning to have an impact. According to Freddie Mac, the average 30-year mortgage rate at the beginning of May was 3.35 percent, but that has risen to 4.40 percent this week – a jump of more than one full percentage point. Not surprisingly, new single-family residential construction has pulled back somewhat as a result, down from 604,000 in June to 591,000 in July. In February, single family starts peaked at 652,000, a level not seen since May 2008, illustrating the recent easing. To be fair, the long-term trend remains positive, with single-family starts up 15.4 percent year-over-year.
The monthly increase in residential construction activity resulted mainly from the rise in multi-family unit starts, up from 242,000 to 305,000. The multi-family segment has been extremely volatile, and in the past 12 months, it has ranged from 212,000 in August to 382,000 in March. Indeed, much of the 7.9 percent decline in June in overall housing starts could be explained by the drop in the multi-family unit number. Even with the volatile figures, there is a clear upward trend, increasing 33.2 percent year-over-year.
At the same time, housing permits were also higher, up from 918,000 in June to 943,000 in July. New residential permits have trended lower since passing the one million mark in April. The data tend to mirror the housing starts figures, with single-family permitting lower (down from 625,000 to 613,000) and multi-family activity higher (up from 293,000 to 330,000). Overall, housing permits have increased 12.4 percent year-over-year, with even stronger growth among single-family units, up 17.9 percent.
To summarize, housing continues to be a major driver of recent economic growth, with residential construction rebounding from its lows after the financial crisis. Both housing starts and permits have great strides, particularly over the past couple years. Nonetheless, the July data also point out the effects of higher mortgage rates, dampening demand for single-family homes in particular. While the longer-term trend in housing should continue, the increase in borrowing costs will no doubt lessen the pace of that upward march. Still, the prospects for growth and for housing starts to once again surpass one million remain good.
Perhaps with this in mind, home builder confidence continues to rise. The National Association of Home Builders (NAHB)’s Housing Market Index (HMI) increased from 56 in July to 59 in August. The last time the HMI was at that level was November 2005. Moreover, this was the third consecutive month with the index over 50 – the threshold in which more builders are optimistic than pessimistic. The HMI has increased significantly over the course of the past two years, with readings of 15 and 37 in August 2011 and August 2012, respectively. Looking forward, the index of single-family sales over the course of the next six months increased has increased from 50 six months ago (February) to 67 in July to 68 in August. This should bode well for growth.
Even with this more-optimistic view of the second half of the year, higher mortgage rates could dampen growth in this important sector. We will be closely watching housing starts and permits data for July to see if increased borrowing costs further ease activity.
Chad Moutray is the chief economist, National Association of Manufacturers.
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