June Housing Starts and Permits
Economics in a nutshell: “Housing is wandering along, but progress continues nonetheless.”
INDICATOR: June Housing Starts and Permits
KEY DATA: Starts: +4.8%; 1-Family: +4.4%; Permits: +1.5%: 1-Family: +1%
IN A NUTSHELL: "Housing is wandering along, but progress continues nonetheless."
WHAT IT MEANS: Home construction may not be a booming business, but it is hardly soft either. Housing starts rose solidly in June, though the large gain came only after the May numbers were revised downward. There were increases in both the single-family and multi-family segments, which was nice to see. Looking across the nation, however, it is hard to find any clear pattern to what is happening in this sector. The Northeast continues to roller coaster along, posting a 46% increase in starts. Of course, that came after a 33% drop in May, so you can see how it is hard to come to any judgment about the state of affairs there. There was also a double-digit increase in construction in the West, the second consecutive solid gain. But that was after two large declines. More moderate declines in the Midwest and South kept the national increase down. As for future construction, permit requests were up modestly, but have lagged construction since January. That does not point to any major future acceleration in activity. Builders are using their permits and the number of homes under construction and the number of homes completed is up sharply from June 2015.
MARKETS AND FED POLICY IMPLICATIONS: Builders are building, it just may be that they are not selling as many as fast as they have hoped. Housing starts this year have increased by over 7% compared to the first half of last year. That is a pretty solid gain. But we have seemingly hit a lull and permit requests and construction activity is no longer accelerating sharply. We see that in the attitudes of homebuilders. The National Association of Home Builders' Index eased in June and has largely wandered aimlessly since peaking last October. Builders' optimism is solid but not rising and that is seen in the construction numbers. The level of starts could stand to rise at least 25% before the market would start looking simply strong. It would take a 50% increase before it was getting too hot. Thus, there is a lot of room to run and it holds out hope that the construction sector can keep adding to growth. However, with Millennials more interested in renting than owning, the upside potential may be limited and we may have to go through a more modest growth cycle before enough decide they really do want to buy. Until then, with mortgage rates low and expected to stay pretty low for an extended period, the outlook is for housing to growth moderately for the next few quarters. This steady growth forecast, though, puts no pressure on the Fed to do anything. As for investors, it's the start of the silliest of seasons, where the wives of candidates can suddenly develop the exact same life story with the exact same world views. Amazing how that happens. Do we really have to go through this election campaign?
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