Fundamental Analysis

Housing Starts Pull-Back in April, as Multifamily Weighs

Typography

Both housing starts and permits started off the second quarter with subpar readings, unwinding some of the progress made during the start of the year. Starts fell 31k to 1172k units from a downwardly revised 1203k print for March, disappointing market expectations for a 1260k reading.

The multifamily segment accounted for the entirety of the decline, with starts down 34k to 337k units. On the other hand, homebuilding in the less-volatile single-family segment increased by 3k to 835k on the month.

Building permits also disappointed consensus, falling to 1229k in April, while a rise to 1270k was expected. Here, single family units accounted for this disappointment, down 37k to 789k from the prior month while the multifamily segment posted a 6k permit gain on the month to total 440k.

Activity in both the Northeast and the South weighed, with the regions posting a 47k and 59k drop in starts, respectively. The Midwest outperformed with a 60k gain for the month as the West trailed behind with a 15k increase during April.

Key Implications

Despite the disappointing headline there was some good news in the report, with the single family segment remaining on an upward trend. This is reflective of continued labor market progress that underpins strong demand for new homes as rising wages support household formation. This segment better reflects economic conditions, and is gaining strength with the number of owner-occupied units surpassing that of renter-occupied units in the first quarter of the year - something not seen since 2006. While the decline in permit activity suggests some caution that may be related to elevated new home prices and the rise in interest rates beginning to weigh on housing demand, we nonetheless expect strong wage and income growth in the coming months will likely provide some relief and support demand for new homes.

The good underlying demand story is corroborated by builder sentiment. Despite builders continuing to face rising building materials costs since the start of the year, notably for softwood lumber, their confidence in the market persists as the NAHB's Housing Market Index for May increased to 70, just below its cyclical high of 71. Low inventory levels continue to pressure prices up, attracting builders to the market.

Today's report puts a bit of a damper on the relatively good economic data seen to start off the second quarter. Still, residential investment should be mildly supportive for overall economic growth this quarter, with GDP likely to clock in at about 3.4% during Q2.

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TD Bank Financial Group
Author: TD Bank Financial Group Website: http://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
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