Housing Starts Soar

Housing starts, newly started construction on residential homes, came in at a seasonally adjusted annual rate of 1.19 million. That’s a 17% increase from revised May figures but still 4% below June of 2019. Single-family starts grew across all regions. In the Northeast, starts doubled to reach pre-crisis levels. Other regions have yet to catch up to where they were at the start of the year. The concern going forward is demand may be short-lived as COVID-related job losses work their way through the economy.

Building permits, a measure of future demand, hit 1.24 million, a 2.1% gain from May, seasonally adjusted, but 2.5% below year-ago levels. Permits for single-family housing gained in all regions, but permits for multifamily dwellings continued to decline in the West.

The specter of the pandemic threatens construction activity even though demand has picked up; construction sites in the Northeast and Midwest stalled as workers became ill and projects were cancelled, even though most states designated construction an essential activity. States caught up in the recent surge of COVID-19 cases and hospitalizations - California, Arizona, Florida, Georgia and Texas, account for almost half of total building permits in the country.

Home builder sentiment, a more real-time measure of housing market development, returned to pre-crisis levels this month with individual components spiking to expansionary highs. The most telling component, traffic of prospective buyers, returned to expansionary territory after plunging to housing-bust-era lows during the lockdown period.

A shortage of existing homes on the market has led buyers to look at newly built homes in suburbs or exurbs since working from home became the default for office jobs. Perks like better broadband connectivity, home office or gym space and backyards are additional incentives.

The 30-year mortgage rate fell below 3% for the first time in history this week. Mortgage applications for purchase soared in April, May and early June as pent-up demand kicked in and virtual viewings became more accepted. Applications started to decline in late June and early July, a sign that demand may be softening.

COVID-19 is becoming increasingly disruptive to employment and the economy overall as the number of infections surges. To add insult to injury, fiscal support in the form of expanded unemployment insurance is slated to end this month, even as permanent job losses mount. Congress does not appear close to a deal to extend benefits.

Bottom Line
The housing market is poised to be a leader of economic recovery but headwinds are accelerating. White-collar workers survived the initial round of temporary layoffs though some suffered wage losses or cuts in hours. The next round may be more severe as businesses grapple with the demand shock that is unlikely to recover before a vaccine is available.

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