May Housing Starts and Permits

Joel L. Naroff
President and Chief Economist

INDICATOR: May Housing Starts and Permits
KEY DATA: Starts: +3.5%; 1-Family: +3.7%; 5+ Units: +8.9%; Permits: +8.7%; 1-Family: +2.5%; 5+ Units: +29.3%

IN A NUTSHELL: “Builders may not be able to compete with distressed homes but that doesn’t mean they have closed up shop.”

WHAT IT MEANS: New construction is not going to be the driving force it once was in this economy, at least for quite a while. But there still are many people who prefer new homes and construction did improve in May. Maybe even more importantly, with so many households no longer able to get into the housing market, the demand for rental housing is rising. That has led to growing activity in the multi-family segment. The rise in construction was not evenly distributed across the nation as starts surged in the West, rose modestly in the South but eased back in the Northeast and Midwest. Looking forward, home building should pick up soon and possibly quite solidly. Permit requests were up strongly, especially for multi-family dwellings. The slowdown in construction in the Northeast may come to an end with gusto as permit requests rose by over 35% in that part of the country. They were also up solidly in the West and moderately in the South. However, there was a small drop in the Midwest.

MARKETS AND FED POLICY IMPLICATIONS: The importance of residential construction has dropped dramatically, which should surprise no one given how weak housing starts have been. However, GDP growth is all about changes in levels not the strength of those levels and it is very likely that housing will add to growth as we move through the second half of the year. Unfortunately, it looks like it has been a major drag during the spring quarter. The number of homes under construction has pretty much stabilized, which could also point to a bottom in activity. Thus, this report can be classified as a pretty good one despite the continued modest pace of construction. Regardless, I don’t think investors are hanging their hats on what happens in the housing market. We can have a recovery without the residential housing segment contributing greatly but it is just not going to be a robust one.

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