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US housing market mired in weakness, but a jump in building permits seen as a positive sign
US HOMEBUILDING fell for a third straight month in July amid a steep decline in the construction of multi-family housing units, but a jump in permits to a seven-month high offered hope for the struggling housing market.
Declining mortgage rates have done little to stimulate the housing market as land and labour shortages constrain builders' ability to construct sought-after lower-priced homes.
Housing and manufacturing are the weakest spots in the economy, which this week has seen a heightened risk of recession.
"After almost a year, lower mortgage rates have done nothing to boost residential housing construction," said Chris Rupkey, chief economist at MUFG in New York. "Housing construction remains the weak link for new investment in the economy and will keep GDP growth slower than it would have been."
Housing starts dropped 4 per cent to a seasonally adjusted annual rate of 1.191 million units last month, the Commerce Department said. Data for June was revised down to show starts falling to a pace of 1.241 million units, instead of dropping to a rate of 1.253 million units as previously reported.
The 30-year fixed mortgage rate has dropped to 3.60% from a peak of 4.94 per cent in November 2018, according to data from mortgage finance agency Freddie Mac.
Homebuilders say lower borrowing costs have not boosted the housing market because mortgage rates have declined due to economic uncertainty.
The US Federal Reserve cut interest rates last month for the first time since 2008, citing growing risks to the economy from the Trump administration's bitter trade war with China, as well as slowing global growth.
Against the backdrop of growing recession risks, consumer sentiment data will be closely watched in the coming months. Consumer spending is the economy's main pillar. Retail sales surged in July.
US Treasury prices were trading lower, lifting the yield on the benchmark 10-year note from three-year lows. That led to a broad rise in stocks on Wall Street. The dollar was little changed against a basket of currencies.
Single-family homebuilding, which accounts for the largest share of the housing market, increased 1.3 per cent to a rate of 876,000 units in July, the highest level in six months.
Single-family housing starts rose in the North-east, West and Mid-west. But homebuilding dropped 3.9 per cent in the populous South, likely disrupted by Tropical Storm Barry, which drenched Louisiana in the middle of July.
Building permits surged 8.4 per cent, the largest gain since June 2017, to a rate of 1.336 million units in July. Last month's surge is a positive development for permits, which have been weak this year. Much of the decline in permits has been concentrated in the single-family housing segment.
A survey last Thursday showed confidence among homebuilders nudged up in August. Builders reported firm demand for single-family homes but said they "continue to struggle with rising construction costs stemming from excessive regulations, a chronic shortage of workers and a lack of buildable lots".
Residential investment has contracted for six straight quarters, the longest such stretch since the 2007-2009 global recession. Growth estimates for the third quarter range from a 1.5 per cent annualised pace to a 2.1 per cent rate.
The economy grew at a 2.1 per cent rate in the second quarter, decelerating from the first quarter's 3.1 per cent pace.
"A dearth of cheap lots and persistent labor shortages are constraining builders, especially for homes costing less than US$300,000, which have the greatest demand," said Robert Frick, corporate economist with Navy Federal Credit Union in Virginia.
Permits to build single-family homes increased 1.8 per cent to a rate of 838,000 units in July, the highest level in eight months. Still, permits continue to lag housing starts, which suggests single-family homebuilding could remain tepid.
Starts for the volatile multi-family housing segment dropped 16.2 per cent to a rate of 315,000 units in July. Permits for the construction of multi-family homes surged 21.8 per cent to a rate of 498,000 units last month.
Housing completions increased 7.2 per cent to 1.250 million units last month. Realtors estimate that housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to plug the inventory gap. The stock of housing under construction fell 0.5 per cent to 1.134 million units in July. REUTERS