Homebuilding took a nosedive in September on account of hurricane-induced disruptions. Housing starts fell (-56k) to 1127k, disappointing markets that had expected a decline to 1175k. Building permits also surprised to the downside, falling (-57k) to 1215k.
Single-family starts accounted for the bulk of the decline, falling by 40k from an upwardly revised (+18k) August reading to register 829k on the month. Multi-family building also suffered a loss, retrenching (-16k) to 298k from a downwardly revised (-15k) August reading.
Building permits weakened on account of business closures related to the hurricanes. However, single-family permits rose 19k to 819k, while the volatile multi-family segment saw permits tumble by 76k to 396k, from a downwardly revised (-28k) August reading.
As expected, activity in the South weighed (-54k), extending the previous month’s losses related to Hurricane Harvey. The Midwest also saw activity subside (-39k), with the Northeast subtracting another 10k units from the headline number, leaving the West as the sole region to see homebuilding gain momentum (+47k).
Key Implications
Today’s headline largely reflects delayed homebuilding in Texas and Florida as a result of Hurricanes Harvey and Irma. Despite the drop in single-family starts, permits advanced strongly, indicating that the weakness in building is likely transitory. Rebuilding in the coming months will continue to be supported by a tightening labor market that has bolstered household incomes and the pace of household formation. Additionally, lending conditions remain supportive, with mortgage rates having slid year-to-date.
Builders regained confidence in October as hurricane-related uncertainty faded, as evidenced by a rebound in the NAHB’s index. However, builders will likely face more substantial labor shortages in the months ahead, with construction activity from the hurricanes requiring even more workers amid a dwindling pool of labor. Additionally, increased demand for building materials will further magnify robust price growth, which may prove to be an obstruction to construction.
Despite these impediments, this report confirms that fundamentals remain strong. As a result, we expect the single-family segment of the market to account for the bulk of the gains going forward, with an anticipated acceleration over the remainder of the year as the estimated minimum 20k houses that were destroyed by the tropical storms are replaced. This will solidify residential investment as a substantial positive contributor to growth into 2018.
