U.S. Housing Starts: When Good News Is Bad

U.S. Housing Starts: When Good News Is Bad

U.S. housing starts unexpectedly rose 8.2% in April, retracing more than half the prior month’s decline. Starts rose in three of four major geographical zones. Moreover, the first upturn in building permits in five months signals potentially higher starts ahead. But that’s where the good news ends. All of the gain in starts stemmed from the volatile multiple-units section, while the steadier detached segment extended a year-long slide to a new 17-year low. Multiples are actually up in the past year, as homeowners downsize or morph into renters. But the truly bad news is that the surge in condo/townhouse construction adds to an already bloated stock of unsold homes. Sales of single-detached new homes sank 8.5% in March and are down 37% in the past year, falling nearly as fast as the 42% plunge in single starts in April. Unless sales spiked higher in April, which is highly unlikely given recent grim reports from homebuilders, the overhang of new detached homes likely stayed at a 27-year high of 11 months (at the current sales rate), almost double the norm. Meantime, the months’ supply of resale condos has topped a year. This can only mean that builders will need to slash prices further to stoke demand, after median prices slid the fastest in 38 years (13.3% y/y) in March. But who wants to buy when prices are falling this quickly and the bottom is nowhere in sight?

The Bottom Line: Despite the surprising upturn in starts and permits in April, the underlying trend in homebuilding remains downwards. Starts may need to fall towards 800,000, as in previous housing downturns, before the inventory glut is absorbed and prices stabilize. While residential construction might not slice another full percentage point from GDP growth in Q2, it may well do so in the second half of the year.

BMO Capital Markets Economics - Sal Guatieri