Market Recap: Housing Starts and Building Permits Down, but Home Builders are Optimistic

Blog posted On May 18, 2018

Mortgage rates continued to trend upward this week.  The National Association of Home Builders’ (NAHB) housing market sentiment index increased by two points with builders maintaining a positive outlook.  The Mortgage Bankers Association (MBA) weekly mortgage application survey declined, pushed down by a drop in refinance applications.  Housing starts and building permits each fell, but single-family home construction was positive.

The NAHB housing market sentiment index is based on home builders’ perceptions on current sales conditions, expectations for the next six months, and buyer foot traffic.  Any reading above 50 is considered positive.  In April, the housing market index improved two points, hitting a level of 70, driven by a 2-point gain in current sales conditions.  Sales expectations for the next six months and buyer traffic were each unchanged at 77 and 51 respectively.  With limited for-sale inventory, home builders have an opportunity to replenish housing stock.  NAHB Chairman, Randy Noel, explained, “The solid May report shows that builders are buoyed by growing consumer demand for single-family homes.”

The MBA mortgage application survey declined for the week ending 5/11, driven by the steady drop in refinance applications.  New purchase applications were down 2.0% and refinance applications were down 4.0% for a composite decrease of 2.7%.  Refinance activity is expected to contract as rates continue to rise.

Housing starts track ground broken on residential projects and building permits track permits issued.  In March, housing starts fell 3.7% to a seasonally adjusted annual rate of 1.287 million.  The loss was driven by an 11.3% decline in multi-family housing units.  However, single-family home building, specifically, is up 0.1%.  Building permits are also down, 1.8% to a seasonally adjusted annual rate of 1.352 million.  Residential construction, in general, has been hurt by rising cost of building materials and inability to find skilled workers. 

The biggest challenge home buyers are facing is limited available inventory.  Home builders have an opportunity to replenish lack of supply.  NAHB chief economist Robert Dietz stated, “Tight housing inventory, employment gains, and demographic tailwinds could continue to boost demand for newly built single-family homes.  With these fundamentals in place, the housing market should improve at a steady, gradual pace in the months ahead.”  

Sources: Bloomberg, CNBC, MarketWatch, Mortgage News Daily, Reuters