Housing Starts Surge In May

Housing starts finally rose to a 1.35 million unit rate in May, a 5% gain on upward revisions to the month of April. A return of more seasonal weather allowed developers to catch up on projects that were delayed earlier in the year. The Midwest and the South, which were the most affected by unusually harsh spring weather, experienced the largest increases. The Northeast also saw some gains in the the single-family home market but from a very low base. The West lost some ground during the month, mostly in the multifamily housing market.

Unfortunately, building permits fell in May, which suggests that construction activity during June and July could fall short of expectations. The highest hurdles are structural. Builder confidence in the housing market deteriorated in June, largely in response to a surge in tariffs and related materials costs. The National Association of Home Builders says that tariffs on lumber and higher materials costs have added $9000 to the average price of a single-family home. Those increases coupled with rising land costs and acute labor shortages, most notably in border states where immigrants once made up a significant part of the labor market for construction, are making it difficult for builders to move downstream where demand is the strongest. Almost all of the improvement in the home ownership rate over the last year and a half was due to a surge in first-time buyer demand.

Home builders also reported a slowdown in foot traffic, which shouldn’t come as a surprise given the recent rise in mortgage rates and home prices. It is becoming harder for first-time buyers to stay in the market. Most disturbing is that the largest deterioration in builder confidence occurred in the South, which accounts for more than half of all housing construction in the nation.

Bottom Line
The bounce in housing starts was welcome but not all that surprising given the delays to projects created by unusually bad spring weather across much of the nation. The gains will add to growth in an already robust quarter for the economy. The question is whether they can be sustained. We expect to see small increases from here. Affordability, however, is beginning to cut into demand in a market that remains underbuilt in most parts of the country.

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