Housing Starts Edge Higher in July

Housing starts rose to a 1.17 million unit pace in July after being revised down for the month of June. Single-family construction picked up a bit on both monthly and year-over-year bases. The gains were much smaller than expected. Multifamily construction increased slightly but remained well below levels seen one year ago. Foreign investment has been sliding for more than a year and is starting to show up in the numbers.

A large rebound in the South accounted for much of the strength in July; unusually hot weather had delayed some projects earlier in the summer. The South is critical to the overall housing market as it is the single largest market for new construction. The Midwest experienced a modest rebound from exceedingly low levels in June. The wildfires in California delayed construction in the West. Rebuilding, once homeowners receive insurance checks, will then siphon limited resources from other parts of the country.

This has been an unusual cycle for housing given the nature of the bust and subsequent recovery. A backlog of dilapidated properties and persistent undershooting on new construction have left demand well ahead of supply. Rising home prices coupled with higher mortgage rates have priced out many would-be buyers.

Permits were up more than starts in July, which could signal pent-up demand though starts have fallen short of permits for several months. Home builder confidence remains elevated but is off earlier highs this year. Foot traffic dropped below 50 in the August report, which signals a contraction for the first time since the disruptions from devastating hurricanes last summer and fall. Active fires in California may explain some of that weakness. The Midwest was the only region where builder confidence fell below 50.

Housing has been showing signs of cresting despite a recent pickup in household formation and the return of first-time buyers. Fannie Mae and Freddie Mac are trying to lower the minimum down payment to make it easier to qualify for a mortgage. The timing is a bit worrisome because we could see a larger impact on home prices when many have already found themselves priced out of the market.

Bottom Line
The housing market was the only weak spot in the economy in the second quarter. The risk is that it could continue to be a drag on growth due to the disruptions from fires in California and the affordability problems in major markets. Housing starts and home sales are now slightly below the levels we saw one year ago.

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