July Housing Construction Lags

July housing starts came in at a lackluster 1.19 million unit annualized rate, a 4% decline from June and a small increase from July 2018. Declines were driven by losses in multifamily units. Single-family starts rose to the highest level since January of this year but are still short of demand. High costs mean builders remain unable to move downstream to build the entry-level homes most in demand by millennials.

Regionally, losses in multifamily units were broad-based. The South, which accounts for over half of all housing starts, was the only region to show losses in both multi- and single-family starts.

Permits came in much stronger at a 1.34 million unit annualized rate, up 8.4% from June, beating expectations. Much of that gain was concentrated in the multifamily market. Single-family permits had modest monthly gains but are still down compared to this time last year. That means that a pending rise in multifamily construction will do little to alleviate the shortage of single-family homes on the market.

A more encouraging indicator for single-family home construction was a recent move up in the foot traffic component of home builders’ sentiment. It crossed the 50% threshold and moved into positive territory for the first time since last fall.

Again, supply seems to be the largest constraint. Costs of everything from land to labor are rising. There were 347,000 unfilled construction jobs recorded in June according to home builders. Historically, single-family home builders relied heavily on immigration to fill those jobs.

Mortgage applications dropped in July and remained heavily skewed toward refinancing in early August. This will put more money in the hands of homeowners but has done little to move the needle for home buyers. Mortgage applications to buy a home rose 2% in early August after four months of declines.

Bottom Line
Summer is not over yet so we could see an increase in August construction activity. Multifamily starts will most likely drive the increases, which is bad news for entry-level homebuyers. Supply constraints and the legacy of the financial crisis have left builders more cautious than they were in the past. Federal Reserve Chairman Jay Powell echoed the unease in builders’ sentiment in his most recent Senate hearings. The forecast for a rate cut in September holds.

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