U.S. housing starts continue to fall in May, single-family home builds likely to pick up in months ahead

U.S. housing starts continued to fall in May, marking a third straight fall and erasing the gains recorded at the beginning of the year. Housing starts dropped sharply by 5.5 percent on a sequential basis, against the consensus expectations of a solid rebound of 4.1 percent. Housing starts fell 64k to 1092k in the month from a downwardly revised 1156k print seen in April.

Single-family housing starts saw a drop of 32,000 on the month, with the multi-family segment down by the same amount. The May performance would be damaging to growth in the second quarter with residential investment likely to be a modest drag on activity in the quarter. Meanwhile, building permits also came in below market expectations, declining to 1168k in May as opposed to the anticipated 1249 print. The volatile multi-family segment was mainly responsible for the majority of the decline in May, while the single-family segment negative contributed a modes 15k from building intentions relative to April.

In the South, activity has been consistently subdued, and this region mainly drove the fall. South recorded a decline of 51k in May, whereas the Midwest region saw a decline from a stellar reading last month. The Northeast maintained its rate of building from April at 87k, while the West recorded a meagre rise of 4k in builds.

Housing has been an important contributor to the U.S. economic growth during the recovery, but after a solid beginning to the year the strong performance would not be repeated this quarter, noted TD Economics in a research report. Increasing mortgage rates and new home prices have been a drag on affordability even as the labor market gains traction. Furthermore, the softness in permit activity offers no consolation, implying that a rapid bounceback is not in the cards, stated TD Economics.

Builders have faced challenging conditions related to a contracting pool of labor, land availability and rising material prices, that have led to rising new home prices. Several of these would continue to be a drag on the sector, but some might recover later in 2017 should materialize as demand for home rises.

The building of single-family homes is likely to pick up in the months ahead, permitting housing to add to growth later this year, added TD Economics. In all, builders continue to be positive, with the June NAHB survey reporting a sound level of sentiment.

“Still, despite the modest drag from residential investment this quarter, we expect economic growth to clock in at just over 3 percent”, said TD Economics.