U.S. Housing Starts Fall 5.8%, Permits Slips 0.4% in August

Housing starts impact by flooding in Texas and Louisiana that disrupted building activity

U.S. housing starts fell more than expected in August 2016 in part driven by a sharp decline in the South, as flooding in Texas and Louisiana disrupted building activity. Groundbreaking fell 5.8% to a seasonally adjusted level of 1.14 million units after two straight months of strong gains, according to the U.S. Commerce Department and as reported by Reuters on September 20th, 2016. Building permits issued for privately owned housing units fell 0.4% in August from July 2016 to a seasonally adjusted annual level of 1.139 million. However, permits for single-family homes, which accounts for about 60% of all permits, grew 3.7% to a 737,000-unit pace in August 2016, the largest gain since June 2014, suggesting a modest momentum for single-family home building.

Source: U.S. Census Bureau
Source: U.S. Census Bureau

The weak housing data came even as the officials from the Federal Open Market Committee (FOMC) have gathered for a two-day meeting to assess the economy and provide guidance on the interest rate policy in the near term. The lower-than-expected housing statistics comes after a stream of recent soft economic data such as retail sales, nonfarm payrolls, and industrial production. Combined with the low inflation, economists are expecting the U.S. central bank to leave interest rates unchanged on Wednesday, September 21st, 2016. On the other hand, confidence among homebuilders rose to an 11-month high in September 2016, according to government data, with builders bullish about current sales and over the next six months, as well as prospective buyer traffic.h2

Housing fundamentals still strong

Single-family housing starts in the South, which accounts for the bulk of home building, tumbled 13.1% to their lowest level since May 2015, mainly because of flooding and heavy rainfall in Texas and Louisiana. Economist believe that the slowdown in August housing starts could be a temporary weather-related blip rather than a major shift in the underlying trend, mainly because excluding the South, housing starts increased a robust 4.2%. The single-family housing market is being supported by a shortfall of previously owned homes that are available for sale.

Housing starts for the multi-family segment fell 5.4% to 420,000 units. The multi-family segment of the market has been buoyed by strong demand for rental accommodation as some Americans avoid buying homes in the aftermath of the housing market collapse. That being said, the market conditions seem to be ideal for new home construction on account of low borrowing costs and inventory of homes for sale.

Groundbreaking on single-family homes dropped 6.0% to a 722,000-unit pace in August, the lowest level since October 2015. However, with a spurt in permits for the construction of single-family homes in August 2016, single-family home building could rebound in the months ahead. Permits for future construction slipped 0.4% to 1.14 million units in August 2016 as approvals for the multi-family homes segment tumbled 7.2% to 402,000 units.

For January-August 2016, permits were down 0.8% compared with 2015, but single-family permits were up 8.4%, year to date. Single-family starts were up 9.1% in January-August 2016.

The housing starts decline in August 2016 was largely anticipated since groundbreaking activity has been running well ahead of permits approvals over the past several months, especially in the single-family housing segment. The August decline left starts just below their Q2 FY16 average, signifying little or no contribution from residential construction to economic growth in Q3 FY16. Although demand for new houses is being driven by a tightening labor market and a corresponding wage growth, spending on home building was a small drag on output during the April-June period. Following the housing starts report, the Atlanta Fed trimmed its Q3 FY16 GDP estimates by one-tenth of a percentage point to a 2.9% annual rate. The U.S. GDP grew 1.1% in Q2 FY16.

U.S. homebuilders ramp up profits

h3Despite the weak housing starts data in August 2016, the underlying strength of the housing sector boosted profits of the country’s top homebuilders.

D.R. Horton Inc. (NYSE: DHI), America’s biggest homebuilder, reported a 13% jump in net income to $249.8 million, or $0.66 per diluted share, in Q3 FY16 from $221.4 million, or $0.60 per diluted share, in the year-ago period. Net sales orders grew 13% to 11,714 homes and 14% in value to $3.4 billion, in Q3 FY16 compared to 10,398 homes and $3.0 billion in the prior year quarter.

Lennar Corp. (NYSE: LEN), the second-largest U.S. homebuilder, reported a 7.3% Y-o-Y jump in home sales to 6,779 units in the three months ended August 31st, 2016, while its average sales price rose more than 3%.

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