Friday, July 18, 2014

New Housing Starts Drop in June

The U.S. Commerce Department reported Thursday that housing starts fell 9.3% in June to a seasonally adjusted annual rate of 893,000, led by drops for single-family homes and apartments. Economists had expected the government to report that the seasonally adjusted annual rate for housing starts hit 1.02 million units in June, slightly up from an originally reported rate of 1 million in May. On Thursday, the U.S. Commerce Department revised May’s starts rate to 985,000.

For context, economists say about 1.7 million starts are needed each year to maintain current stock and meet demand for replacement and second homes.

It’s worth noting that June’s construction-starts drop of 9.3% had a confidence interval of plus or minus 10.3% — indicating that the government isn’t sure whether the pace of new construction actually fell last month.

Over the past year, escalating prices and mortgage rates have hit housing demand, and a particularly harsh winter took a toll in the first quarter. A relatively low number of homes on the market has also constrained sales.

Officials have been worried about whether the housing market’s rebound has petered out. Earlier this week, Federal Reserve Chairwoman Janet Yellen told U.S. lawmakers that the housing sector has “shown little recent progress,”  and that readings this year “continued to be disappointing.”

Starts for single-family homes fell 9% last month to the slowest pace since November 2012, while starts in structures with at least five units dropped 11.3%.

Why the home construction report wasn’t completely awful

Although June’s headline home-construction data were surprisingly bad, underlying details hint that the market may not be in awful shape.

Of note, among the four U.S. regions, only the South — the largest market — recorded a starts drop in June.

“The headline number was very weak, but the report is exceptionally uneven and on balance is not an indication of a significant turn in housing construction,” said Eric Green, head of U.S. rates & economic research at TD Securities.

Meanwhile, in a spot of good news, permits for single-family homes — an indicator of future demand — rose 2.6% to an annual rate of 631,000, the fastest pace in seven months. Overall permits, which also include apartments, fell 4.2% to a 963,000 pace in June.

Looking forward, sales and building rates could pick up, thanks to a strengthening labor market. Indeed, home builders are becoming perkier, with a reading on their confidence showing that they turned optimistic this month on sales trends, following five months of pessimism.

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