Economic Watch: New Home Starts Drop, Builders Still Upbeat

The number of housing starts in the U.S. fell more than expected in March, but home builder confidence in the market remains strong, according to two new reports.

New home starts fell 8.8% from the month before to an annual rate of 1.09 million, the lowest level since October, according to Commerce Department figures. The department also slightly revised February’s performance upward.

The March drop was led by a 9.2% fall in single-family home construction, as this largest share of the homebuilding market hit an annual rate of 764,000 – the lowest level since October.

However, that followed it reaching the best pace in February since October 2007 (just before the housing market crashed as we entered the Great Recession.)

An indicator of future building activity, the number of new building permits issued, also fell in March, by 7.7% to its lowest level in a year.

Despite the monthly declines, homebuilding has increased significantly over the past year. New home starts in March rose 14.2% from a year earlier and the number of new building permits issued posted a 4.6% gain.

There are also double-digit improvements in home starts in the first quarter of 2016 compared to the first three months of 2015, up 14.5%. Single family home starts in March are up 22.6% compared to a year earlier.

“The housing sector has been one of the silver linings of the U.S. recovery, continuing to contribute and support top line activity,” said Lindsey Piegza, chief economist at Stifel Fixed Income. “However, at this point, with a lackluster manufacturing sector, faltering consumer spending, and negative business investment, any further weakness in real-estate activity could serve to exacerbate the forecast slowdown at the start of the year, as well as undermine any improved growth profile April-June.”

RBC Economics is forecasting housing activity should benefit from a strong labor market, still-low interest rates, and a further unwinding of earlier tightening in mortgage lending conditions.

Homebuilders Remain Optimistic

A separate report released Monday shows builder confidence in the market for newly built single-family homes remained unchanged in April at a level of 58 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Builder confidence has held firm at 58 for three consecutive months, showing that the single-family housing sector continues to recover at a slow but consistent pace,” said NAHB Chairman Ed Brady. “As we enter the spring home buying season, we should see the market move forward.”

The HMI components measuring sales expectations in the next six months rose one point to 62, and the index gauging buyer traffic also increased a single point to 44. Meanwhile, the component charting current sales conditions fell two points to 63.

Scores for each component are used to calculate a seasonally adjusted index, where any number over 50 indicates that more builders view conditions as good than view it as poor.

“Builders remain cautiously optimistic about construction growth in 2016,” said NAHB Chief Economist Robert Dietz. “Solid job creation and low mortgage interest rates will sustain continued gains in the single-family housing market in the months ahead.”