Residential construction in the US tumbled last month, according to the Census Bureau’s June report. Housing starts dropped a hefty 9.9% to a seasonally adjusted annual rate 836,000, the lowest since last August. The decline was substantially below expectations, and the red ink is compounded by the fact that newly issued building permits also retreated, retreating by 7.5% vs. May.
One theory for what happened is that wet weather in June played the spoiler and kept building activity low. A more ominous view is that higher interest rates are taking a toll. What's clear is that starts and permits have run into headwinds in recent months, and June was no exception.
The damage is also infecting the year-over-year comparisons. The annual pace for both starts and permits has fallen substantially this year. Indeed, the 10.4% gain in starts last month vs. the year-earlier level is the slowest rate of growth since 2011.
Is the housing recovery over? Maybe, but it’s still premature to say so with much confidence, even if today's data looks like a smoking gun. A more plausible scenario, at least for now, is that the rebound in housing is transitioning to a lower speed. As I’ve noted in the past, it’s always been naïve to expect that the 20%-to-40% year-over-year increases in the recent past would be sustainable. Those hefty increases reflected an extraordinary period that was a largely a byproduct after a lengthy correction that probably went on for too long.
Demographic-driven demand kept inching forward, even when the homebuilding industry went into hibernation after the housing crash of 2006-2009. There was a false start in 2010 to deliver more supply, but it faltered. A year later, a second leg of the rebound commenced, leading to a relatively robust increase in building activity. In December 2011, I wondered if the housing recovery was the real deal. As it turned out, it was, and probably still is. But the low-hanging fruit has been picked.
Granted, there’s a bit more risk these days for projecting that the housing recovery will roll on. On that note, the next round of monthly updates may be critical for deciding if we’re downshifting to a lesser rate of growth vs. moving into a period that’s considerably darker for housing.
For now, I’m inclined to favor the lower-pace-of-growth scenario. Why? One encouraging trend is the labor market, which is still growing moderately, as it has been for some time. In fact, a broad set of economic and financial indicators continue to trend positive with regards to estimating the business cycle for the US. Meanwhile, confidence in the home building industry continues to rise, with the NAHB/Wells Fargo Housing Market Index (HMI) for July posting its third consecutive monthly gain and its highest reading since January of 2006. And despite the recent pop in interest rates, mortgage rates remain close to historic lows. The national average for the conventional 30-year fixed mortgage last week was around 4.5%. That’s roughly a two-year high, but otherwise we’re still at levels unseen in decades. The price of financing the purchase of a house, in other words, is still inexpensive by historical standards.
The risk, of course, is that interest rates rise too much, too fast from here on out. A sudden turn for the worse in payrolls would be disturbing as well. Suffice to say, there are many things could wrong for housing and we shouldn’t be blind to those possibilities. But stepping back and considering the broad macro picture as currently known still leaves plenty of room for anticipating that moderate growth is still the likely scenario for the near term.
Yes, that big-picture trend can and will change. In fact, it’s always in flux, and it's possible we're at a critical juncture in the here and now. But the bigger danger is confusing noise with a change in the overall trend. How will you know the difference? Let’s just say that a higher level of clarity requires more than a few weak months in the housing data.