Housing starts ran into a wall in July, the Commerce Department reported Wednesday, dropping 4.8% to a seasonally adjusted rate of 1.16 million units – a 5.6% year-over-year decline. While 1.229 million housing starts were expected, 1.155 million were reported.
A slump in multifamily home construction led the decline. Building permits for multifamily homes were down more than 11% (permits for single-family units were largely unchanged). It was the third-lowest monthly housing starts figure in the last eight months and added fuel to suggestions that June’s 8.3% increase was an aberration.
"This can be largely attributed to increases in construction costs, labor shortages and in some places shortages of buildable land," explained Rachel Ivers, a salesperson with The Blake Team at Keller Williams and a student at the University of Colorado Boulder. "As a result, we see house prices going up even as demand for housing remains the same."
"With the latest report showing both single and multifamily housing starts falling below expectations, markets will be rethinking hopes of a third-quarter rebound," cautioned John Engle, president of Chicago-area family office merchant bank Almington Capital. "The constraints on builders from a shortage of both labor and usable lots are unlikely to let up over the short run. Housing demand continues to be strong, and prices will continue to rise in the absence of sufficient supply."
John Boyd Jr., principal of The Boyd Co. Inc., a Princeton, New Jersey-based location company, found the decline in permits "troubling, signaling more headwinds for the housing market in the third quarter."
"Lawmakers need to look at trade policy and workforce training policy here," he said. "Duties on imports of Canadian lumber are increasing costs for homebuilders, and vocational schools around the country need more resources to fund workforce training programs tailored to the construction industry."
"The Great Recession was largely debt-driven – bad mortgages and loose lending standards," offered Alex Doubet, CEO of Texas-based DoorHomes.com. "This time around seems to be largely driven by a lack of supply and heightened demand. Home prices are going up, and there is no relief in sight.
"The dark underbelly of this trend is that housing affordability is decreasing. The 'American Dream' of owning a home is going to continue to be pushed upward into higher income demographics, particularly in urban areas."
The news was not all negative, according to Brian Davis, director of education for SparkRental.com.
"Construction permits are up 4.1% from last year, and 2017 has seen a solid 5.6% bump in permits over the same period in 2016," he said. "Even housing starts in 2017 have been 2.5% higher than in 2016, though the last few months have been largely slow for them."
Still housing starts are below their 1.5 million historical average. Reuters’ Lucia Mutikani wrote that job growth could spark a housing market recovery, but Engle was skeptical.
"While job growth has been robust elsewhere, construction has been having issues," he said. "While the broader jobs trends have been positive, they aren't likely to boost housing starts to where they need to be to meet demand."
"Job growth is a positive indicator and should provide some tailwinds for the housing industry," Boyd said. "What gives me pause is that we have seen positive job growth and are still seeing historically high lack of inventory – despite the growing demand. Perhaps an easing of construction lending restrictions may be the jump start the market needs here. Maybe lawmakers need to consider making it less costly for builders to borrow money and build new single-family homes, repurposing projects and mixed-use developments."
Ivers offered a potential remedy for the housing industry and also advocated mixed-use construction.
"Since the demand for housing still remains the same," she said, "my hopes are to see homebuilders start building more mixed-use, denser housing as opposed to the traditional expensive and expansive single-family homes. In order for homebuilders to address construction costs and labor shortages, they need to start thinking smart, and thinking smart has a lot to do with making improvements on the land in a different way than they have before. Mixed-use, denser living is the smart way to go."
While there were exceptions, most residential construction stocks were up by the close of trading Wednesday. Texas-based D.R. Horton Inc. (DHI, Financial), the largest home construction company in the U.S., was up 0.14%. California-based KB Home (KBH, Financial) was up 1.9%. Miami-based Lennar Corp. (LEN, Financial) was up 0.04%.
"Look at Home Depot (HD, Financial) and TJX Companies (TJX, Financial), up 1.39% and 2.04%," Boyd said. "In an otherwise dismal retail sector, Home Depot and TJX are thriving because people are not buying new homes and instead remodeling and investing in their current homes. The market is showing us the lack of inventory of new housing with the upward stock trajectory, in an otherwise difficult climate for retail, in these two companies."
Disclosure: I do not own any stocks mentioned in this article.
