A Mixed Report For U.S. Housing Construction In May

|
Includes: IYR, REZ, XHB
by: James Picerno

New residential housing construction dipped slightly in May, falling 0.3% vs. the previous month, the US Census Bureau reports. Meanwhile, newly issued building permits rose 0.7% last month. The mixed profile also shows up in the year-over-year changes for both indicators, albeit in reverse. The key takeaway: the recent slowdown in housing construction growth will probably linger for the foreseeable future. That's not dire news, but today's update suggests that the housing sector's ability to boost economic growth generally may be waning.

Note that building permits fell on a year-over-year basis for the second month in a row. Considered a leading indicator for construction activity, permits slumped 10.1% in May vs. the year-earlier level - more than twice the annual decline in April.

Click to enlarge

Housing starts, by contrast, rebound in year-over-year terms, rising 9.5%. That's a refreshing change from April's mild decline. Nonetheless, today's update reflects a relatively subdued rate in residential housing construction vs. recent history.

The optimistic view is that housing will continue to grow at a modest pace. A degree of support for this outlook can be found in this week's survey data from the National Assoc. of Home Builders (NAHB). The trade group's Housing Market Index in June rose to its highest reading in five months. "Builders in many markets across the nation are reporting higher traffic and more committed buyers at their job sites," NAHB Chairman Ed Brady said in a statement. The implication: We'll see firmer numbers in construction activity in this year's second half.

"All along we expected this would be a pretty gradual recovery and that’s largely coming true," the chief economist at Raymond James Financial tells Bloomberg. "We’re still very far from a boom period in housing at all here, but I think the fundamentals are still pretty good."

Perhaps, although the weak link in the upbeat outlook is the slide in permits in annual terms. The back-to-back declines mark the weakest run for this indicator in five years. If the June report for permits makes that three in a row, the case for thinking positively about the housing market may be headed for an attitude adjustment.