Following a decline in a prior month, U.S. housing starts bounced back in May, increasing by 5% m/m to 1.35 million units (annualized). The increase was ahead of market expectations, which called for a 1.9% gain.
Gains in starts were broad-based with both single and multifamily starts improving on the month. Starts in the volatile multi-family segment rose by 7.5% (to 414k) on the month and are now 25% above their year-ago level, while single-family starts posted a more modest increase (+3.9% to 936k).
Building permits, meanwhile, disappointed (-4.6%), falling for the second consecutive month with fewer permits issued for both single and multi-family segments.
Looking at the regional breakdown, gains were extremely uneven. Housing starts increased only in the Midwest, rising by a whopping 62.2%. Meanwhile, construction was weaker elsewhere. The biggest decline was in the Northeast (-15% m/m) with weakness attributed entirely due to slower multi-family construction, followed by the West (-4.1%), and the South (-0.9%).
Key Implications
Today’s headline print on the housing starts is certainly a good number, beating consensus and delivering gains in both single and multi-family segments of the market. However, details of the report painted a less exciting picture, with gains concentrated entirely in the Midwest and permits declining for the second consecutive month.
Still, looking through monthly numbers which have been quite choppy, residential construction has been on a stronger footing this year, following a lull in 2017. In the first five months of the year, starts are up on average 10% from the same period a year ago.
Tariffs on steel and escalating trade tensions pose headwinds to homebuilding activity. According to the National Association of Home Builders, tariffs on lumber from Canada have added nearly $9,000 to the price of an average new single-family home since January 2017. In May, even before the new tariffs took hold, prices for construction materials were up by 5.9% from a year ago – the fastest pace of the recovery. Rapidly increasing input costs will weigh on home builders’ margins and lead to higher prices for perspective home buyers, straining affordability at a time when rising mortgage rates and relatively high property prices are already making home ownership less accessible. This has prompted us to slightly downgrade our outlook on residential investment this year.
