Housing starts fell to 708,000 in May from an upwardly revised 744,000 unit rate in April. Multi-family starts (mostly apartments) were revised up in April, which set the stage for the May decline. Single-family starts actually edged up slightly in May compared to April, but remain extremely suppressed, relative to both history and demographic trends. Looking ahead, building permits rose almost 8% last month; single-family homes accounted for half of that increase.
Builders are complaining that obtaining “desirable” land is becoming a hurdle for the market, as much of the land closest to the major cities has already been developed. This is always been the case and is likely exacerbated by the surge in gas pieces, which has made long commutes even less tenable than before gasoline prices crossed the $3 per gallon mark. This is to say nothing of the ongoing competition from the existing market, which remains intense, despite tightening of inventories of turnkey properties. Most buyers can get more for their money in the existing home market than in the market for newly built homes.
Another problem for a more broad-based recovery in housing construction is capacity constraint. Building material manufacturers, in particular, remain reluctant to ramp up until we see a much more significant increase in demand and, in the prices buyers are willing to pay to build a home. This can’t happen until we see a more substantive increase in home values in general.
Bottom Line: The housing market is healing, but too gradually to give the economy the kind of boost we really need at this stage of the game. Federal Open Market Committee (FOMC) members will be watching this closely as they deliberate over policy today and tomorrow.