March Housing Starts Down, While Construction Permits Rise

American homebuilders started construction on new houses in March at a slower pace, but in an ironic twist, the number of construction permits jumped to their highest level in 3 ½ years.  This is a positive signal for the slumping residential industry.  According to the Department of Commerce, housing starts fell 5.8 percent to an annual rate of 654,000, significantly below the MarketWatch forecast of economists who had projected an increase to 703,000.  Housing starts in February were also revised down slightly, to 694,000 from 698,000.  At the same time, building permits — a measure of future demand — rose 4.5 percent to 747,000 in March from February’s revised 715,000.  The increase occurred entirely in the multi-dwelling housing segment.

The increase in permits suggests builders are increasingly optimistic as the industry recovers from the worst slump in modern times. Multi-family permits rose 24.2 percent to 262,000.  On the other hand, permits for single-family homes fell 3.5 percent to 462,000 — evidence that builders still face pressure from a deluge of foreclosures.  Many buyers are looking for deals on existing homes instead of paying more for new construction.

Some economists speculate that warm weather contributed to the March decline in housing starts because it allowed builders to start new projects in January and February that they normally would have begun in spring.  “It appears that the payback from an unusually warm fall and winter came in March as record warm temperatures likely pulled new construction forward,” said Yelena Shulyatyeva of BNP Paribas.

The average March temperature was 51.1 degrees; that’s 38.6 degrees warmer than the 20^th century average and the hottest March since records were first kept in 1895, according to the National Oceanic Atmospheric Administration.  Spring home sales are expected to outpace last year as record low mortgage rates produce an attractive market for home buyers.  The average fixed rate on a 30-year mortgage was 3.88 percent in mid-April, according to Freddie Mac and may fall again.

An oversupply of unsold homes is holding prices down, creating a major difficulty for the sector, said Gregory Miller, an economist at Suntrust Banks in Atlanta.  “The production side of the housing market is in the early stages of recovery, but builders are shifting their composition of products from condos and single-family homes to apartment construction.  It’s going to be rocky for awhile.  You still have inventory overhang.  There are also issues on the financing side of production as well as the mortgage side.  The problem is getting over the financing hurdle. Lenders are still very concerned about where they put their capital.  From a trend perspective, it is still on a rising path.  Tentative is the best we could say about this.”

Even a slow-growing housing market is a big plus because it is no longer a drag on the broader economy. Residential real estate was the cause of the financial crisis and the recession, so it’s encouraging to see this sector moving in the right direction.  It’s early to expect strong, sustained growth in the immediate future.  “Housing continues to bump along the bottom,” said Jacob Oubina, a senior economist at RBC Capital Markets.  “The best we can hope from housing over the next couple years is that it won’t subtract from growth.”

According to Omer Esiner, Chief Market Analyst, Commonwealth Foreign Exchange, “The housing data is mixed.  On the one hand housing starts came in below expectations and on the other hand it was a strong month for permits, which bodes well for the months ahead.  So the rise in permits kind of offsets the disappointing data.”