US housing starts surprise on the upside – or do they?

While moderate increases were expected, both US housing starts and permits improved much more than expected. For both starts and permits however, this was all due to double-digit month-on-month improvements in the volatile multi-family segments. We prefer to concentrate on the more reliable single-family segment. Single-family starts edged up 0.8%MoM. Not stellar, but definitely not bad either: This is still 9.8% up from a year ago.

Single-family permits best reflect homebuilders’ expectations for the near future. They increased by 0.3%MoM to 602k (saar), which is lower than the trend before the bad winter weather hit, and also slightly (3.2%) lower than a year ago. Housing demand has proven not to be immune to the effects of higher mortgage rates and price hikes on housing affordability.

The adjustment to higher mortgage interest rates — or more accurately, to the end of the ultra-low rates era — is well underway now. Mortgage applications for house purchases, an early yet volatile indicator of housing demand, fell sharply in the second half of 2013 but seems to have stabilised since the beginning of this year. This suggests that the correction in sales and construction should be mostly behind us now. This is broadly in line with yesterday’s NAHB homebuilder sentiment survey. Although builders reported a further slippage in sales this month, they also saw a slight pickup in the number of prospective buyers.

We expect the housing market to show further signs of stabilisation in the coming months. The housing market may not be the buoyant growth engine that it was last year, but we do not expect it to provide credible reason for the Fed to delay tapering or postpone interest rate hikes either.

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