Where’s that spring rebound? No sign of it in today’s update on residential construction activity. Housing starts in the US fell more than expected in May, dropping to an annual rate of 1.001 million units, according the Census Bureau. That’s down from the revised 1.071 million in April. The crowd was looking for something better, with the consensus forecast calling for a kinder, gentler retreat to 1.036 million. There was also disappointing news for newly issued building permits, a leading indicator for residential construction. On a monthly basis, the numbers don’t look so bad, but there’s a worrisome trend brewing when we review the data in year-over-year terms.
In particular, note that the number of permits issued is now contracting relative to the year-earlier number. For the year through last month, permits have inched lower by just under 1.9%. This is the first year-over-year slump since January and the biggest annual retreat since 2011.
The “optimistic” interpretation is that this is all about a temporary correction after starts rallied strongly in April, far above the level of permits. As such, today’s update represents a realignment of the two data sets. Over time, starts and permits tend to track each other rather closely, and for obvious reasons, and so once the misalignment is straightened out we’ll see more upbeat numbers.
“We’ going to see a bounce back after weather held everything down in the first quarter,” Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities, tells Bloomberg. “Things are moving in the right direction. There’s going to be more demand for housing, with some of it rental and some ownership.” But he said that before the release of this morning’s housing data and so there’s a case for at least toning down the cheerleading.
Then again, one reason for thinking that the positive spin is at least partly plausible: yesterday’s sentiment update on the home building industry offers some encouragement for anticipating that starts and permits will stabilize if not perk up in the months ahead. Builder confidence rose more than expected in the June release of the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), moving to just under the neutral 50 mark. That implies that the next report on starts and permits will deliver stronger numbers. Commenting on the sentiment data, NAHB Chairman Kevin Kelly said in a press release:
"After several months of little fluctuation, a four-point uptick in builder sentiment is a welcome sign and shows some renewed confidence in the industry. However, builders are facing strong headwinds, including the limited availability of labor."
NAHB Chief Economist David Crowe added:
"Consumers are still hesitant, and are waiting for clear signals of full-fledged economic recovery before making a home purchase. Builders are reacting accordingly, and are moving cautiously in adding inventory."
For the moment, however, there’s still a fair amount of uncertainty about the housing market. Is it still poised for growth? Or is it stuck in neutral… or worse? Today’s update doesn’t offer much clarity. This much, however, is clear: If the annual rate of permits continues to sink deeper into the red, the trend will flash a warning sign for housing and permits the broader economy.