Residential Construction Down in June

Following two consecutive monthly increases, single-family starts fell by 9.1 percent over the month of June to a seasonally adjusted annual rate of 858,000, according to a joint release by the Census Bureau and the Department of Housing and Urban Development. However, over the quarter, starts of single-family houses was about flat, rising by 1.2 percent to 900,000. This is the first time that single-family starts average at or above the 900,000 level in a quarter since the third quarter of 2007. Moreover, at the half-year mark, single-family starts on a not seasonally adjusted basis are 8.1 percent ahead of their year-ago pace.

Despite the broader increase, builders continue to face challenges that added costs to single-family production. The figure below indicates that most of the growth in single-family starts since 2011 has been in speculatively built homes. However, the cost pressures faced by builders have made it difficult to produce homes at competitive price points, especially for entry-level buyers where inventory is most needed. Since reaching a low in the first quarter of 2011, the count of speculatively built single-family houses has risen 125 percent as of the end of the first quarter, after falling to 20 percent of its first quarter of 2006 level.

Meanwhile, contractor or owner-built single-family houses have only risen by 28 percent since their low in the first quarter of 2011. Since the first quarter of 2011 contractor-built homes have increased by 42 percent while owner-built homes have risen by 8 percent. Although more analysis is needed, these underlying trends in single-family starts suggests that, for non-speculatively built homes, rising cost pressures may be more likely to hinder production outright.

In the near future, single-family starts may grow at a modest pace. The NAHB/Wells Fargo Housing Market Index (HMI) was flat over July. Also, permits for single-family construction rose by 0.8 percent over the month. The monthly increase in single-family permits reflected 4.1 percent growth across the South, which accounted for 37 percent of single-family permits nationwide. Meanwhile, single-family permits fell over the month in the Northeast, 5.3 percent, the Midwest, 4.1 percent, and the West, 1.9 percent.

Multifamily starts fell by 19.8 percent to a seasonally adjusted annual rate of 315,000. Over the quarter, multifamily starts, which reached 362,000 on a seasonally adjusted annual rate basis, were 15.4 percent lower than their level in the first quarter of 2018, 428,000. Over the first half of 2018, multifamily starts are still up, 7.2 percent ahead of its pace over the first six months of 2017.

NAHB originally expected multifamily starts to be about flat in 2018 reflecting underlying economic fundamentals. Over the first three months of 2018, relative to the first three months of 2017, growth of multifamily starts was driven by smaller buildings. Meanwhile, multifamily starts of the largest buildings, those with 20 or more units, rose by three percent. The figure below indicates that the increase in multifamily starts since the end of the most recent recession largely reflects starts of 20 or more units. Meanwhile, starts of smaller buildings have seen less growth. An updated Quarterly Starts and Completions by Purpose and Design will tell whether the quarterly decrease in multifamily starts reflects a return of smaller building starts to the levels that prevailed since the recession, or an outright decline in 20 or more unit building starts.

Going forward, multifamily starts may be modest as multifamily permits fell by 7.6 percent in June. The declines were spread over the Northeast, 12 percent, the Midwest, 39 percent, and the west, 2 percent. Meanwhile, multifamily permits in the South rose two percent. Previous analysis has shown that the South region, along with the West, has been a primary contributor to the pace of multifamily permits nationwide.



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