Housing Starts Increase

Housing starts moved back above the one-million-unit mark again in July, and were revised up for the month of June. This is a highly volatile and unreliable series, but we will take what we can get when it comes to housing; the gains are also corroborated by the survey of home builder confidence, which showed a marked improvement in both foot traffic and serious buyers in July.

Gains were greater in multifamily units than single-family units which is unfortunate because we tend to see more employment and spillover spending from owner than renters, but it is still a move in the right direction. The South, by far the largest market, saw the biggest gains in both single and multifamily construction. The Midwest was the weakest market. That is likely more reflective of sampling error or just lagged data, as the Midwest is the strongest market going forward, according to home builders; they also callĀ  the South, somewhat disappointingly was the weakest for single-family homes in the survey. The Northeast also saw strong gains in the multifamily market in July, but from a low base because so much of the Northeast is already heavily developed.

Building permits also picked up, but not as rapidly as starts, and remained concentrated in the multifamily category. Indeed, if we manage to be surprised on the upside by construction activity this year it will be in the multifamily market. Most of that is for rentals, although luxury condos are also beginning to show a comeback. Again, we will take what economic activity we can get, but our housing market model was designed in the U.S. to build a lot of single-family homes for owners, not multifamily homes for renters.

Bottom Line: An uptick in housing starts is good news and affirms our view that the market is currently under-built. The shift toward multifamily rentals over single-family homes continues, however, which means that the gains we are seeing in overall construction activity will have less of a positive impact on spending, production and employment than in the past, an issue that the Federal Reserve is watching extremely closely.

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