Multifamily Construction Leads The Housing Market

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Includes: BBRE, DRN, DRV, FREL, FRI, FTY, HOML, HOMZ, IARAX, ICF, ITB, IYR, JRS, KBWY, LRET, NAIL, NRO, PKB, PPTY, PSR, REK, RFI, RIF, RNP, RORE, RQI, RWR, SCHH, SRS, URE, USRT, VNQ, XHB, XLRE
by: American Institute of Economic Research
Summary

Housing construction activity was mixed in May as starts fell by 0.9 percent while permits for future construction rose 0.3 percent.

For housing permits, total permits rose 0.3 percent to 1.294 million from 1.290 million in April.

The National Association of Home Builders' Housing Market Index fell to 64 in June, down from 66 in May.

By Robert Hughes

Housing construction activity was mixed in May as starts fell by 0.9 percent while permits for future construction rose 0.3 percent. Total housing starts dropped to a 1.269 million annual rate from a 1.281 million pace in April. The dominant single-family segment, which accounts for about three-fourths of new home construction, fell 6.4 percent for the month to a rate of 820,000 units, which extends a modest downtrend (see top chart). Starts of multifamily structures with five or more units jumped 13.8 percent to 436,000, pushing activity above the robust 300,00 to 400,000 range that multifamily starts have been in for much of the last two economic expansions (see bottom chart). From a year ago, total starts are off 4.7 percent, with single-family starts down 12.5 percent and multifamily starts up 13.8 percent.

Among the four regions in the report, total starts fell in three, the Northeast (−45.5 percent), the West (−2.4 percent), and the Midwest (−8.0 percent), while the South rose 11.2 percent. For the single-family segment, starts followed a similar pattern, falling in three regions but rising in the South.

For housing permits, total permits rose 0.3 percent to 1.294 million from 1.290 million in April. Total permits are 0.5 percent below the May 2018 level. Single-family permits rose 3.7 percent to 815,000 in May (see top chart) while permits for two- to four-family units were off 17.8 percent and permits for five or more units were down 3.7 percent to 442,000 (see bottom chart). Permits for single-family structures are down 3.3 percent from a year ago while permits for two- to four-family structures are up 8.8 percent and permits for structures with five or more units are up 4.2 percent over the past year.

The National Association of Home Builders' Housing Market Index fell to 64 in June, down from 66 in May (see top chart). All three components of the index had declines in the latest month. The current single-family sales index fell to 71 from 72 in the prior month, expected single-family sales over the next six months fell to 70 from 72, and the index for traffic of prospective buyers declined to 48 from 49 in May.

Overall, single-family housing activity remains broadly stagnant. Both starts and permits have been in a mild downtrend in recent months. The sharp drop in mortgage rates may provide a bit of a tailwind, but there is little evidence to suggest a significant acceleration in single-family housing activity in the coming months and quarters. Multifamily housing remains generally robust, sustaining activity at a high level. However, given the high level, it's unlikely that it can go much higher.

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