It was a banner month for residential construction in July, with both housing starts and permits shattering expectations and gains in both hitting recent highs.
Starts spiked 22.6% from the revised June estimate — the largest month-over-month gain since October 2016 — to reach a seasonally adjusted annual rate of 1.496 million units, according to the U.S. Census Bureau and the Department of Housing and Urban Development. That annualized pace is up 23.4% the July 2019 rate of 1.212 million and far exceeded economist expectations between 1.2 and 1.3 million starts.
“Homebuilders picked up the pace of construction again in July, with both single- and multifamily starts up strongly,” said Mike Fratantoni, senior vice president and chief economist for the Mortgage Bankers Association (MBA). “This data lines up [with] the strong gains in MBA’s latest Builder Application Survey … Homebuyer demand remains robust, inventories are tight, and there is a need for new units to keep the pace of sales going.”
Year to date, overall starts through July are at 763,200, up 4.7% from the same time last year.
“The market is being buoyed by historically low interest rates, a focus on the importance of housing and a shift to the suburbs as more buyers are seeking homes in suburban communities, exurbs and more affordable low-density markets,” said Robert Dietz, chief economist for the National Association of Home Builders.
Single-family starts in July came at an annualized rate of 909,000, up 8.2% from June and up 7.4% from July last year. While still off the pre-recession peak pace of 1.034 million units in February, single-family construction has been on the rise since sinking to a pandemic-low rate of 679,000 in April. Year to date, single-family starts are now up 0.9% from the same period last year.
Multifamily starts, meanwhile, propelled the big overall July jump, with starts for units in buildings with five units or more vaulting 56.7% from June. Those starts finished July at a rate of 547,000, up a whopping 67.8% year-over-year. The strong July helped the current rate of apartment construction remain above the NAHB’s forecast, despite the organization projecting that multifamily construction will decline more than the single-family side due to the pandemic and downturn.
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The quickening of the multifamily construction pace may seem shocking, given that apartment vacancy rates have risen of late and rents have weakened. The Wells Fargo Securities Economics Group, however, observed that demand outside the country’s largest metros may be providing construction headwinds.
“Vacancy rates have increased and rents have softened much more in New York City, San Francisco and Los Angeles, however, than nationwide,” Wells Fargo said in commentary following the release of housing starts data. “The weakness in these highly visible markets may be weighing on forecasts for the sector.
“Demand for apartments outside these mega-metro areas has actually remained fairly strong and rents have held up much better. Moreover, the move away from these large, densely-populated, high-cost metro areas has boosted demand elsewhere, such as Phoenix, Salt Lake City, Austin, Charlotte and Nashville.”
Permitting numbers only add to the construction report’s positive blush. Permits were issued in July at a seasonally adjusted annual rate of 1.495 million, up 18.8% from June and 9.4% from July 2019.
Economists had anticipated an overall permitting rate of 1.3 million. Single-family permits grew 17.0% from June to an annualized pace of 983,000 units, while multifamily permits increased 22.5% to a rate of 512,000 units.
Fratantoni noted that the growth from June’s already robust rate indicates that builders will continue to ramp up production in the coming months. Indeed, just one day before July housing data was released, the NAHB reported that builder confidence matched an all-time high in August.
Year to date, permits are at 794,800, up 2.2% through July compared to the first seven months of 2019. Multifamily permits are at 244,500, down 4.8% year-to-date, but single-family permits are 5.8% above 219 at 526,100.
Housing completions also grew both monthly and yearly in July, though on a more moderate basis. Completions in July were at a seasonally adjusted annual rate of 1.280 million, up 3.6% from June and 1.7% from July 2019.
Amidst all the positives, NAHB chairman Chuck Fowke did note one downside: the strong market for new homes has driven up the price of lumber.
“Strong builder confidence and heavy buyer traffic point to further production gains in the near term,” Fowke noted, “but the more than 110 percent jump in lumber prices since mid-April is adding approximately $14,000 to the cost of each new single-family home.”
