IHS Inc.

US Housing Starts Fall 6.5% but Single-Family Permits Reach 20-Month High

  • Housing starts retreated 6.5% in May, falling to a 1.001 million annual rate.
  • Single-family starts shed 5.9% to a 625,000 annual rate; multifamily starts slipped 7.6% to a 376,000 rate.
  • Building permits dropped 6.4%; the single-family side advanced 3.7%, while the multifamily category plummeted 19.5%.
  • Affordability concerns and pipeline pressures are holding back the single-family market.

According to Patrick Newport and Stephanie Karol, U.S. economists with IHS Global Insight, the May 2014 Housing Starts and Building Permits report from the U.S. Census Bureau  was a decent report, overall. While starts dropped from their six-month high, they remain above the 1 million mark.

The report contains one nugget of very good news: single-family building permits rose by 3.7%, the largest monthly advance since September 2012. This gain was broad-based, with each region posting a statistically significant increase in single-family permits in May.

While it is tempting to herald these numbers as the beginning of the next phase of the recovery, one good month does not a revival make. Over the past year, home building has become a delicate balancing act. Poor affordability mandates that builders keep their construction costs low, or else shrink their margins — no easy task. Builders find themselves needing to raise wages in order to attract talented construction workers, and paying top dollar for well-located lots. Lot location is key: according to the National Association of Home Builders, while the total number of developed lots is rising, few shovel-ready plots are located in areas buyers find desirable.

Is US Housing Construction Stalling?

Outlook

Since distressed sales present buyers with a cheaper alternative to purchasing a new home, we should be seeing builders double down as the pipeline of distressed sales runs dry. But as existing home inventories ease, and prices rise for conveniently located lots, consumers may prefer to purchase a well-located existing home over a newly built home in a remote area.

The good news: Demand for construction and land development loans is on the rise, while lending standards have begun to thaw. This should work in builders’ favor, but it will take some time.

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