Slump in U.S. Housing Starts Led by Multifamily: Economy

Home Construction
Subcontractors work on a house under construction at a Norton Commons residential subdivision in Louisville, Kentucky on Aug. 15, 2014. Photographer: Luke Sharrett/Bloomberg

Housing starts slumped in August from the highest level in almost seven years, reflecting a setback in multifamily projects that are at the forefront of the rebound in U.S. real estate.

Beginning home construction fell 14.4 percent, the most since April 2013, to a 956,000 annualized rate following July’s revised 1.12 million pace that was the strongest since November 2007, the Commerce Department said today in Washington. Work on apartments and condominiums, which tends to be volatile, dropped 31.7 percent after jumping 44.9 percent in July.

As more Americans decide that homeownership isn’t for them because wage growth is slow and qualifying for mortgages remains difficult, builders have focused on putting up more rental units, which means the industry will see bigger swings month to month. The average number of multifamily units started over the past 12 months was the most since 2006.

“There’s been a fairly compelling recovery in multifamily construction because people need apartments to live in; on the other hand, there’s been significantly less recovery in the single-family market,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York. The construction figures “will continue to improve, but it’s going to continue to be an erratic improvement.”

Over the past 12 months, construction has been started on an average of 349,000 multifamily structures, the most since the same period ended July 2006.

Market Breakdown

Starts of single-family properties declined 2.4 percent to a 643,000 rate in August from the previous month. They’ve averaged 630,000 over the past 12 months. While that’s up from the depths of the economic slump, excluding the recession and subsequent recovery, the reading would be the weakest since 1982.

A slowdown in homeownership in the wake of the housing bubble that coincided with the last recession points to further gains in construction of rental properties, according to McCarthy.

Another report today showed fewer Americans than forecast filed applications for unemployment benefits last week, a sign the labor market continues to strengthen. Jobless claims decreased by 36,000 to 280,000 in the week ended Sept. 13 from 316,000 in the prior period, according to the Labor Department. The median forecast of economists surveyed by Bloomberg called for a decrease to 305,000.

Stocks rose for a third day, sending benchmark indexes to records, as investors speculated interest rates will remain low. The Standard & Poor’s 500 Index advanced 0.5 percent to 2,011.36 at the close in New York.

Construction Permits

The Commerce Department’s construction report showed permits for future projects dropped 5.6 percent to a 998,000 pace in August from a 1.06 million rate the prior month.

The median estimate in a Bloomberg survey of 78 economists called for a 1.04 million pace of housing starts. Forecasts ranged from 995,000 to 1.12 million after a previously reported 1.09 million in July.

All four regions showed a decrease in groundbreaking last month, led by a 24.7 percent drop in the West that was the biggest since November 2012.

Today’s figures were at odds with a report yesterday showing builder confidence rose in September to the highest level since 2005. The National Association of Home Builders/Wells Fargo said its sentiment measure climbed to 59 from 55 in August. Readings above 50 mean more respondents said conditions were good.

Builder Confidence

The housing rebound is good news for companies including PulteGroup Inc., a Bloomfield, Michigan-based homebuilder and seller.

“We’ve been actually pretty pleased with the overall progress of the U.S. housing recovery,” James Zeumer, vice president for investor relations, said in a Sept. 10 presentation. “We’re still in sort of the early-to-middle innings of what will be a protracted and methodical type of recovery.”

Weather dealt a setback to builders at the beginning of the year as snow blanketed construction sites in parts of the country and cold kept some would-be buyers at home. Homebuilding bounced back in the second quarter, climbing at a 7.5 percent annualized rate after a 5.3 percent slump in the first three months of the year, data from the Commerce Department showed July 30.

Cheap borrowing costs are helping some Americans take the plunge into homeownership. The average 30-year, fixed-rate mortgage was 4.12 percent in the week ended Sept. 11, down from 4.53 percent at the start of January, according to data from Freddie Mac in McLean, Virginia.

Labor Market

An improving job market is also helping Americans to afford a home. The economy has added an average of 215,000 jobs per month through August, according to Labor Department figures, more than the 194,000 average last year. The unemployment rate has fallen to 6.1 percent from 6.6 percent at the start of the year.

Another report today showed Americans are less upbeat about the economy because wage gains remain a missing element in the expansion. A measure tracking the economic outlook dropped to 41.5 this month, the weakest since October, from 45 in August, data from the Bloomberg Consumer Comfort Index showed today. The reading was the second-lowest since January 2012.

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