July Housing Starts Stumble

Housing starts stumbled in July, HUD and the Census Bureau reported Wednesday.

The report said privately owned housing starts in July fell to a seasonally adjusted annual rate of 1.115 million, down 4.8 percent from June’s revised rate of 1.213 million and down 5.6 percent from last July’s 1.223 million rate.

Building permits also fell between June and July to a seasonally adjusted annual rate of 1.223 million but remain more than 4 percent above the year-ago permitting figure, HUD and Census said.

Mark Fleming, chief economist with First American Financial Corp., Santa Ana, Calif., said the figures send a “mixed message” for the housing market. “Permits and starts increased 4.1 percent and decreased 5.6 percent respectively compared to a year ago,” he said. “While the increased pace of permits–a leading indicator of starts–is encouraging, the decrease in housing starts is particularly troubling.”

Fleming called the pace of single-family housing starts, 856,000 (seasonally adjusted), important because it represents near-term new supply that the housing market currently lacks.

“The employment situation report released earlier this month reported an increase of 5,100 residential construction jobs between June and July,” Fleming said, noting the number of residential construction jobs is 4.9 percent higher than a year ago. “The growth in residential construction jobs supports further improvement in the pace of home building because building a home does not readily lend itself to outsourcing and automation. Home building still requires manual labor as a key input into the production process. It’s very hard to increase housing starts without increasing residential construction employment.”

Fleming noted the lack of more home building is one reason why the housing market is currently strained by a lack of inventory for sale. He said there have been eight years of insufficient new housing units supply compared to the increase in new households.

“As more and more Millennials age into household formation, the pace of housing starts will need to not only meet but exceed the growth in new households so that the housing inventory shortage doesn’t increase further,” Fleming said. “More home building is needed, otherwise nominal home prices will only go one way–up.”