Housing starts unexpectedly declined in June to a nine-month low, led by a record plunge in the South that shows the construction industry must still overcome hurdles before it can contribute more strongly to U.S. economic growth.
Work began on 893,000 homes at an annualized rate, down 9.3 percent from a 985,000 pace in May that was weaker than previously estimated, according to figures from the Commerce Department issued today in Washington. Other reports showed manufacturing was gaining steam this month and fewer Americans filed claims for jobless benefits last week as consumer sentiment hovered near this year’s high.
A shortage of buildable lots and experienced construction workers, higher prices and mortgage rates that have climbed from record lows mean residential real estate will struggle to help the world’s largest economy. The figures, along with a decline in building permits, corroborate Federal Reserve Chair Janet Yellen’s view that progress in the housing market has been “disappointing.”
“Something that was anticipated to be a big recovery in the spring just has turned out not to be,” said Jay Morelock, an economist at FTN Financial in New York whose starts estimate was among the lowest in the Bloomberg survey. “We see more or less a stabilization. I don’t think it’s going to crash and I don’t think it’s going to accelerate.”
Stocks tumbled, with the Standard & Poor’s 500 Index falling the most in three months, amid escalating tension in Ukraine and the Middle East. The S&P 500 lost 1.2 percent to 1,958.12 at the close in New York.
Equities extended losses in the final hour of trading after reports that Israel began a ground operation in the Gaza Strip. The crisis in Ukraine escalated after a passenger jet crashed in the main battleground of the civil war. The government in Kiev blamed pro-Russian rebels for shooting down the Malaysian Airlines jet, while the separatists denied the accusations.
The median estimate of 79 economists surveyed by Bloomberg projected housing starts would climb to a 1.02 million rate. Estimates ranged from 957,000 to 1.1 million after a previously reported 1 million in May.
Construction slumped 29.6 percent in the South, the biggest plunge in data going back to 1959, to a 375,000 pace, the weakest in almost two years. The three other regions showed increases, led by a 28.1 percent jump in the Midwest to a 219,000 annualized rate, the strongest since August 2007. The Northeast rose 14.1 percent and the West climbed 2.6 percent.
Starts in the South may have been hurt by a shortage of buildable lots as development was held up by the unusually harsh winter, said Brad Hunter, chief economist of housing-research firm Metrostudy in Palm Beach Gardens, Florida. Builders in North Carolina say they don’t have enough supply of land, and homes now under construction are usually sold before they’re completed, he said.
“It’s more of a supply issue than a demand issue in North Carolina,” Hunter said in a telephone interview. “Sales agents say it’s easy to sell if they have inventory.”
Other economists thought the magnitude of the slump in the South made the data suspect.
“It’s so bizarre I don’t put any weight on it,” said Mark Zandi, chief economist for Moody’s Analytics in West Chester, Pennsylvania. “If it came in on the light side I’d be more uncomfortable because it might suggest construction just isn’t getting traction. But this is just so out of bounds that it doesn’t feel right to me.”
Big swings in the regional data are common. The Census Bureau notes in its release that because month-to-month movements “may be irregular,” it may take four months to establish an underlying trend in total housing starts.
The figures on construction applications were also mixed. Building permits decreased 4.2 percent in June to a 963,000 annualized rate, a second consecutive decline. Nonetheless, the drop was concentrated in the more-volatile multifamily projects, which fell 14.9 percent. The number of permits issued for single-family houses, the biggest part of the market, rose 2.6 percent to the highest level since November.
Residential real estate has been slow to emerge from an early-year, winter-driven slump -- a development not lost on Yellen.
While housing has recovered from its lows, “activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing,” Yellen said this week during her semi-annual testimony to the Senate Banking Committee.
The average rate for a 30-year fixed mortgage was 4.13 percent this week, according to Freddie Mac in McLean, Virginia. While down from 4.53 percent at the start of the year, it’s higher than the 3.35 percent in May 2013.
Prices have increased as well, hurting affordability for those getting into the market. The median selling price of a new home sold in May increased 6.9 percent from the same month last year to reach $282,000.
At the same time, payroll gains are brightening the outlook for the market. A report yesterday showed confidence among homebuilders rose in July to the highest level in six months. The National Association of Home Builders/Wells Fargo sentiment measure climbed to 53 from 49 in June, the Washington-based group reported. Readings above 50 mean more respondents said conditions were “good.”
Another report signaled employment will probably keep growing. Jobless claims declined by 3,000 to 302,000 in the week ended July 12, the Labor Department said. More muted firings typically pave the way for acceleration in job growth.
The report also showed the number of people continuing to receive jobless benefits fell to a seven-year low.
Lennar Corp. is among companies counting on continued gains in hiring to drive sales. The Miami-based homebuilder reported a quarterly profit that beat analysts’ estimates as it raised prices and delivered more properties.
“The fundamental drivers of improvement in the housing market remain a steadily improving economy with a slowly improving employment picture unlocking pent-up demand while supplies remain constrained to meet that demand,” Chief Executive Officer Stuart Miller said on a June 26 conference call. A shortfall in single- and multifamily homes is “likely to continue to define the housing markets for the foreseeable future and will drive the housing recovery forward.”
Manufacturing, on the other hand, is gaining traction. The Federal Reserve Bank of Philadelphia today reported its factory index jumped to 23.9 in July, the highest level since March 2011. Readings greater than zero signal growth in the area of eastern Pennsylvania, southern New Jersey and Delaware.
The central bank’s orders index, at 34.2, was the highest since July 2004 and the second-strongest since 1988.
“The manufacturing data looks very good,” said Aneta Markowska, chief U.S. economist at Societe Generale in New York. “That fits a little bit better with our outlook for the economy.”
American households are also feeling upbeat. The Bloomberg Consumer Comfort Index was little changed at 37.5 in the week ended July 13 compared with 37.6 in the prior period, a report today showed. The index has been hovering close to the 2014 high of 37.9 reached in April. Last week’s reading was the fourth-strongest since the start of 2008.
The report also showed the buying-climate gauge climbed to its second-highest reading in more than six years.
“The reason businesses are getting more optimistic is because they’re aware of the position that households are in, which is getting healthier at the margin,” Markowska said.