The Census Bureau and the U.S. Department of Housing and Urban Development reported mixed news on new residential construction for August. Total housing starts were slightly higher, up from a revised 883,000 in July to 891,000 in August, an increase of 0.9 percent. On the other hand, housing permits declined 3.8 percent for the month, down from 954,000 in July to 918,000 in August. In both cases, single-family figures were up marginally, with the multi-family housing construction down significantly for both starts and permits.
The good news is that new single-family residential construction continues to its slow-but-sure upward ascent. Average single-family housing starts were 536,583 in 2012, with a year-to-date average for 2013 of 612,250. Along those lines, you can paint a positive picture, with single-family starts up from 587,000 in July to 628,000. At the same time, it is hard to ignore the fact that the market appears to have stalled since the first quarter. In March, single-family starts topped out at 652,000, and they have been lower ever since. This suggests that higher mortgage costs might have had an impact.
Yet, single-family permitting provides some hope that, even with increased borrowing costs, Americans continue to seek new housing. This is an important indicator moving forward, particularly with the sector being one of the brighter spots in the economy of late. Single-family permits rose from 609,000 in July to 627,000 in August. That is the highest level observed since May 2008, edging out the 625,000 recorded in June.
The volatility in the housing starts and permits data were in multi-family units. New multi-family residential construction decreased from 296,000 in July to 263,000 in August. This was the lowest level of multi-family starts since August 2012, with this segment down from its recent peak of 382,000 in March. Similarly, multi-family permits declined from 345,000 in July to 291,000 in August, with that figure down from 391,000 in April. As such, multi-family construction has been on a downward path in recent months, providing much of the softness that we have seen in the total numbers.
Overall, the housing starts and permits data are disappointing, with growth in this all-important sector stalling since the spring. To be sure, the increase in mortgage rates has partially reduced the demand for new homes. According to Freddie Mac, the average 30-year mortgage last week was 4.57 percent, up from 3.35 percent in the first week of May. Yet, single-family housing appears to be holding up, even with higher borrowing costs. This is especially true when you look at single-family permitting, which hit a 5-year high, boding well for future activity. One could argue that the growth rate might have been faster without higher interest rates, but at least the sector’s underlying long-term trend remains positive.
With that in mind, home builders continue to be mostly positive. The National Association of Home Builders (NAHB) said that their Housing Market Index (HMI) was unchanged in September at 58. One year ago, the HMI stood at 40, and two years ago, it was 14. This clearly illustrates the tremendous gains in confidence seen among home builders over the past two years as the housing sector has rebounded. Moreover, this was the fourth consecutive month with the HMI exceeding 50 – the threshold over which more builders are optimistic than pessimistic.
With that said, the HMI has not budged much since the July reading of 56. This indicates at least a modest pause in recent gains. NAHB Chairman Rick Judson, a builder from Charlotte, NC, said that higher interest rates have provided “some hesitancy on the part of buyers.” He added, “Home buyers are adjusting to the fact that, while mortgage rates are still quite favorable on a historic basis, the record lows are probably a thing of the past.”
Speaking to this last point, the index for single-family sales traffic declined slightly from 68 to 65. This still puts the measure at highs that it has not experienced in several years, and yet, it does indicate a moderate degree of dampened demand for the sector.
Chad Moutray is the chief economist, National Association of Manufacturers.
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