The pace of housing construction slowed in May, after a post-winter rebound in April. However, forward-looking indicators, most notably the NAHB/Wells Fargo Housing Market Index and the expansion of housing permits, suggest more growth ahead.
The pace of housing starts in May declined 11.1% from an elevated April to a seasonally adjusted annual rate of 1.036 million single-family and multifamily residences, as reported by the Census Bureau and HUD. Single-family starts experienced a 5.4% drop to an annual rate of 680,000, while multifamily fell 20.2% to a 356,000 pace. When viewed from a quarterly average, however, the first two months of the second quarter were better than the first quarter for both single- and multifamily starts: single-family up 9% and multifamily up 20%.
Looking forward, the NAHB/Wells Fargo Housing Market Index (HMI) for June increased to 59, a five-point rise from May and tied for the highest since September 2014. The underlying components of the HMI also showed strong increases. The current sales component increased seven points to 65, the highest since November 2005. The expected sales index rose six points to 69 and also the highest since October 2005. The traffic index rose five points to 44, matching the January level.
Three regions within the HMI experienced an increase for their three-month moving averages, while the Midwest fell a point to 54. The Northeast rose three points to 44 but remains below levels set for the first two months of 2015. The South rose three points to 60 and back to the high it achieved in late 2014. The West rose two points but is still well below early 2015 levels.
Another positive sign is growth for building permits, which were up 11.8% in May to a seasonally adjusted annual rate of 1.275 million, the highest annual rate since August 2007. Single-family permits were up 2.6% from April and are up 9.1% from May 2014. Permits for single-family homes were up 8% in the Midwest.
Multifamily permits for five-plus unit properties were up 26% for the month, with particularly strong growth in the Northeast due to an expiring tax break in New York City as well as ongoing strong rental demand in East Coast metro areas. Individual metropolitan permit data is available one month later than national figures, and those data through April show substantial increases in multifamily permits over the same four-month period in 2014 for the New York metropolitan area (50%), Boston (56%), Pittsburgh (142%) and Albany, N.Y. (215%).
There’s mixed news for supply-side headwinds in recent data. Building material prices have eased recently, with softwood lumber prices declining 2.3% in May and down 10% from the latest peak in early 2014, according to the BLS PPI data. Gypsum prices have been flat in recent months, although after the increases experienced in the last few years, prices are now 1.8% higher than the peak levels set during the housing boom.
On the other hand, access to labor remains a top business challenge. According to the BLS Job Openings and Labor Turnover Survey and NAHB analysis, the number of open construction sector jobs (on a seasonally adjusted basis) declined from 168,000 to 153,000 from March to April. However, the March estimate of open construction jobs was the highest since July 2007, while the April reading was the third-highest monthly tally since the recession.
With respect to housing demand, a recent survey from the Federal Reserve confirms that most renters hope to transition to homeownership. According to the data collected in October 2014, 81% of renters would prefer to own if they could afford it. Half of renters reported that they lack the funds for a downpayment, and almost one-third noted that they could not qualify for a mortgage. The survey also found that 94% of home owners expected their home to maintain or grow in value over the next year.