Homebuilders made up for previous months’ contractions breaking ground on 1215k units in June – the highest level since February. This surprised to the upside, with expectations for a 1160k print. Compounding this is the healthy reading for building permits that also surpassed expectations and clocked in at 1254k on the month, the highest level since March.
Single family homebuilding accounted for the bulk of the growth, rising by 50k from last month, while the volatile multi-family segment wasn’t far behind at 43k. This is enough to leave the quarter with a net gain of 25k in the construction of single-family units. Activity in the multifamily segment was largely unchanged in the quarter.
Permits surpassed expectations, with the single family segment posting the strongest gain since December 2016, rising by 32k in June. Multi-family permits also increased by a strong 54k on the month. These are welcome developments, suggesting further strength in homebuilding will follow.
The Northeast saw the strongest growth in starts (+72k) since the first half of 2016 while the Midwest also saw activity expand by a robust 37k. In contrast, the South added to a string of consecutive declines in activity as starts fell by 21k in June. Activity in the West was little changed (+5k).
Key Implications
After a dismal start to Q2, homebuilding activity finally picked up in June to end the quarter with a net gain in housing starts. While costs for homebuilders have increased amid land supply constraints, labor shortages, and rising building material costs – with softwood lumber prices, already under upward pressure from softwood lumber tariffs, rising further as a result of the fires in British Columbia – builders have so far passed on the costs to consumers. Overall, builders are maintaining confidence as demand has remained strong with this sentiment echoed in the July NAHB survey that indicated optimism amongst builders.
Strong demand from homebuyers will continue to underpin construction activity as rising incomes offset any drag from rising mortgage rates. This notion is corroborated by the fact that the less volatile single-family segment accounted for the bulk of the increase, with permitting activity boding well for near-term starts.
While today’s report erases the contraction in starts at the beginning of the quarter, the level of activity during the second quarter still remained below that in the first quarter with residential construction expected to be a drag on growth in the second quarter, which should still clock in at a relatively healthy 2.7%. The strong handoff into the third quarter suggests that residential investment should once again become supportive of economic growth in the third quarter.
