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The number of US homes which began construction fell again for the third month in a row in July, led by a sharp drop in the construction of multi-family homes like apartment complexes. At 1.191 million units, housing starts were well below projections of 1.257 million. However, permits, an indicator of future construction, saw a sharp increase.

Key Takeaways

• Housing starts in July dropped -4% to an annual rate of 1.191 million units according to a report released on Friday by the Commerce Department.
• Multi-family homes, an often-volatile component, accounted for most of the drop with a steep decline.
• Permits, an indicator of future construction, jumped to a seven-month high.

The housing market continued to show signs of weakness in July with another month of decline in housing starts. The reported figure of 1.191 million units was well below expectations of 1.257 million units.

However, there may be light at the end of the tunnel – the decline was mostly due to a sharp drop in a volatile category, and building permits have hit a seven-month high, perhaps indicating an uptick on the horizon. Another factor to consider is Tropical Storm Barry, which struck Louisiana in mid-July and may have seriously disrupted homebuilding efforts.

June data was revised lower to show the rate of homebuilding dipping to 1.241 million rather than the 1.253 million originally reported. The housing market has yet to show signs of renewed health following the drop in mortgage rates from 4.94% to 3.60%. Land and labor shortages continue to impact the sector, making it difficult to construct low-priced homes which are now in high demand. With a tight inventory, the housing market has seen slow sales throughout the last year.

Report Data

Single-family homebuilding, which accounts for the largest share of the housing market, rose 1.3% to a rate of 876.000 units in July, a six-month high. Single-family housing starts rose in the Northeast, West, and Midwest, but fell 3.9% in the South, where most homebuilding takes place.

Permits for single-family homes rose 1.8% to 838,000 units, an eight-month high – however, permits continue to lag housing starts, possibly indicating that single-family homebuilding figures may remain flat at best. Housing starts for multi-family housing dropped 16.2% to 315,000 units in July – construction permits for that category rose 21.8% to 498,000 units.

Building permits rose 8.4% to 1.336 million units in July, a two-year high. Permits have been slow all year, and a major uptick is a positive sign for the future of the housing market. A survey released on Thursday showed an increase in homebuilder confidence, with robust demand for single-family homes. However, respondents stated that they “continue to struggle with rising construction costs stemming from excessive regulations, a chronic shortage of workers and a lack of buildable lots.”

Comments on July Housing Starts https://t.co/uKwMgKVyLm pic.twitter.com/ImoBfblL7U

— Bill McBride (@calculatedrisk) August 16, 2019

The Effect of Lower Rates is Uncertain

Addressing the apparent lack of impact felt from reduced mortgage rates, builders said the market had not benefited because the “rate declines occurred due to economic uncertainty.” Residential investment has now declined for six quarters in a row, the longest run since the housing collapse and resulting recession of 2007-2009.

The Federal Reserve is expected to cut interest rates again next month amid concerns of a recession due to slowing global growth and escalating trade tensions, and lower mortgage rates may yet have a positive effect on the struggling housing market. The US 2-year Treasury note yield rose above the 10-year bond yield for the first time since June 2007 on Wednesday.

Market Reaction

Gold prices have seen selling pressure following the release of the report. Spot gold last traded at $1,515.07/oz, down 0.30% with a high of $1,527.22/oz and a low of $1,506.89/oz. While the headline results of the housing report indicates ongoing weakness, an uptick in multi-family homes at the very least is likely in the near future. The data, coupled with the recently-reported increase in builder confidence, may have contributed to a decline in safe-haven demand.