US housing starts in Nov up but single-family segment still weak

Washington

US homebuilding rebounded in November, driven by a surge in multi-family housing projects, but construction of single-family homes fell to a 11/2-year low, pointing to deepening housing market weakness that could spill over to the broader economy.

The report from the US Commerce Department on Tuesday also showed housing starts fell in October instead of rising as previously reported.

Underscoring the housing market weakness, single-family home completions dropped for a third straight month in November to their lowest level in more than a year.

"The residential construction market hit the pause button in 2018," said Aaron Terrazas, senior economist at Zillow. "Speculation has already begun as to whether the construction industry is a macroeconomic canary in the coalmine signalling a larger shift to come."

Housing starts increased 3.2 per cent to a seasonally adjusted annual rate of 1.256 million units last month.

Data for October was revised down to show starts dropping to a rate of 1.217 million units instead of the previously reported pace of 1.228 million units.

November's increase in homebuilding followed two straight monthly declines. Housing starts fell 3.6 per cent on a year-on-year basis in November.

While building permits shot up 5 per cent to a rate of 1.328 million units last month, they were powered by a jump in the volatile multi-family housing segment.

Permits for single-family homebuilding, which accounts for the largest share of the housing market, barely rose last month.

Economists polled by Reuters had forecast housing starts slipping to a pace of 1.225 million units last month.

The housing market is being constrained by higher mortgage rates as well as land and labour shortages, which have led to tight inventories.

Although house price inflation has slowed significantly, it continues to outpace wage growth, sidelining some first-time homebuyers.

Continued weakness in the sector, which is sensitive to interest rates, could be flagging a slowdown in the overall economy.

Economists, however, do not expect the softening housing market to discourage the US Federal Reserve from hiking rates when policymakers conclude a two-day meeting on Wednesday (Thursday morning, Singapore time).

The US central bank has increased borrowing costs three times this year. The 30-year fixed mortgage rate has risen more than 60 basis points in 2018 to about 4.63 per cent, according to data from mortgage finance agency Freddie Mac.

"Mortgage rates have already priced in a 3 per cent Fed funds rate more or less, so a few more Fed rate hikes won't sting the housing market any further," said Chris Rupkey, chief economist at MUFG in New York.

"It is important to stay on a gradual path of rate hikes or they risk telegraphing to the markets and investors that they are worried about the economic outlook."

The PHLX housing index was trading higher, in line with a broadly stronger US stock market. The dollar slipped to a one-week low against a basket of currencies amid caution ahead of the Fed's rate decision. Prices of US Treasuries rose.

Residential investment contracted in the first three quarters of this year, the longest stretch since mid-2009.

Homebuilding investment is expected to have declined again in the fourth quarter and the soft patch is seen persisting through the first half of 2019. Housing and trade are expected to cut into economic growth in the October-December period.

Last month, single-family homebuilding dropped 4.6 per cent to a rate of 824,000 units, the lowest level since May 2017. It was the third straight monthly decline in single-family homebuilding.

A survey on Monday showed confidence among single-family homebuilders dropped to more than a 21/2-year low in December, with builders reporting that "consumer demand exists, but customers are hesitating to make a purchase because of rising home costs".

Single-family starts in the South, which accounts for the bulk of homebuilding, jumped 6.8 per cent last month. They tumbled 9.5 per cent in the Northeast and plunged 24.4 per cent in the West, probably because of wildfires in California.

Groundbreaking activity on single-family homes dropped 3.2 per cent in the Midwest.

Permits to build single-family homes edged up 0.1 per cent in November to a pace of 848,000 units. These permits are now above the level of single-family starts, suggesting some pickup in home-building is likely.

Starts for the multi-family housing segment soared 22.4 per cent to a rate of 432,000 units in November. Permits for the construction of multi-family homes rose 14.8 per cent to a pace of 480,000 units.

The multi-family housing segment is being boosted by demand for rental apartments.

"Until the demand for owner-occupied homes rebounds, it is difficult to see why single-family starts will turn around," said David Berson, chief economist at Nationwide in Ohio.

Tuesday's data also suggested that housing supply is likely to remain tight in the near term. Single-family homebuilding completions in November dropped 5.4 per cent to a rate of 772,000 million units, the lowest level since August 2017. REUTERS