U.S. Housing Starts Drop, Building Permits Plunge To 2-Year Low

by Ike Obudulu Posted on July 17th, 2019

Washington: Reflecting a steep drop in multi-family housing starts, the Commerce Department released a report on Wednesday showing a bigger than expected decrease in new residential construction in the month of June.

The Commerce Department said housing starts slid by 0.9 percent to an annual rate of 1.253 million in June after slipping by 0.4 percent to a revised rate of 1.265 million in May.

Economists had expected housing starts to fall by 0.6 percent to a rate of 1.261 million from the 1.269 million originally reported for the previous month.

The bigger than expected decrease came as multi-family starts nosedived by 9.2 to a rate of 406,000, more than offsetting a 3.5 percent jump in single-family starts to a rate of 847,000.

Housing starts plummeted by 9.2 percent in the South and 4.9 percent in the West but soared by 31.3 percent and 27.1 percent in the Northeast and Midwest, respectively.

The report also unexpectedly showed a substantial pullback in building permits, an indicator of future housing demand.

Building permits plunged by 6.1 percent to an annual rate of 1.220 million in June after climbing by 0.7 percent to a revised rate of 1.299 million in May.

Economists had expected building permits to rise by 0.5 percent to a rate of 1.300 million from the 1.294 million originally reported for the previous month.

With the much steeper than expected drop, building permits fell to their lowest level since hitting a rate of 1.201 million in May of 2017.

While single-family permits crept up by 0.4 percent to a rate of 813,000, multi-family permits plummeted by 16.8 percent to a rate of 407,000.

Compared to the same month a year ago, housing starts in June were up by 6.2 percent but building permits were down by 6.6 percent.

“The [housing] sector has been facing significant headwinds,” said ING Chief International Economist James Knightley. “Material costs have been rising and there is the obvious exposure to trade tensions given imports of timber and metal.”

“Nonetheless, we remain upbeat on the prospects for U.S. housing,” he added. “After all, the consumer is in great shape with employment at record levels, wages rising strongly in real terms and confidence remaining firm.”

Knightley noted mortgage rates have plummeted in the wake of the plunge in U.S. Treasury yields, which have come under pressure amid expectations of a near-term interest rate cut by the Federal Reserve.

Why Markets Care About Housing Starts

Housing Starts measures annualized number of new residential buildings that began construction during the previous month. It is released monthly, about seventeen days after the month ends.

The compilation of the housing starts series is a multistage process.

First, a monthly estimate of the number of housing units for which building permits have been issued in all permit-issuing places is obtained from the Census Bureau’s Building Permits Survey.

Second, for each permit selected from the permit-issuing places, an inquiry is made of the owner or the builder to determine in which month and year the unit(s) covered by the permit was (were) started. In case the units authorized by permits in a particular month are not started by the end of that month, follow-ups are made in successive months to find out when the units were actually started.

Ratios are calculated (by type of structure) of the number of units authorized by permits, based on the Building Permits Survey, to the number of units authorized by permits based on estimates generated from the  permit offices. These ratios are then applied to the appropriate estimate of the number of units started, based on the permit offices, in the corresponding months or groups of months to provide ratio adjusted estimates of the number of units started for each month or group of months.

The rates are calculated for single-family structures for each of the four Census Regions and for structures with two units or more for each of the four Regions.

Adjustments are made to account for those units started prior to permit authorization and for late reports. These adjustments are based on historical patterns of pre-permit starts and late data. No adjustment is made for units in permit areas built without a permit.

While this is monthly data, it’s reported in an annualized format (monthly figure x12). Housing Starts data is slightly overshadowed by Building Permits because they are highly correlated and a permit must be issued before a house can begin construction

The usual effect is that ‘Actual’ greater than ‘Forecast’ is good f or the dollar and vice versa.

Housing Starts is a leading indicator of economic health because building construction produces a wide reaching ripple effect. For example, jobs are created for the construction workers, subcontractors and inspectors are hired, and various construction services are purchased by the builder.

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