December 18, 2018 / 2:10 PM / a year ago

U.S. housing starts rise; single-family segment still weak

WASHINGTON (Reuters) - U.S. homebuilding rebounded in November, driven by a surge in multi-family housing projects, but construction of single-family homes fell to a 1-1/2-year low, pointing to deepening housing market weakness that could spill over to the broader economy.

FILE PHOTO: Development and construction continues on a large scale housing project of over 600 homes in Oceanside, California, U.S., June 25, 2018. REUTERS/Mike Blake/File Photo

The report from the Commerce Department on Tuesday also showed housing starts fell in October instead of rising as previously reported. Underscoring the housing market weakness, single-family home completions dropped for a third straight month in November to their lowest level in more than a year.

“The residential construction market hit the pause button in 2018,” said Aaron Terrazas, senior economist at Zillow. “Speculation has already begun as to whether the construction industry is a macroeconomic canary in the coalmine signaling a larger shift to come.”

Housing starts increased 3.2 percent to a seasonally adjusted annual rate of 1.256 million units last month. Data for October was revised down to show starts dropping to a rate of 1.217 million units instead of the previously reported pace of 1.228 million units.

November’s increase in homebuilding followed two straight monthly declines. Housing starts fell 3.6 percent on a year-on-year basis in November. While building permits shot up 5.0 percent to a rate of 1.328 million units last month, they were powered by a jump in the volatile multi-family housing segment.

Permits for single-family homebuilding, which accounts for the largest share of the housing market, barely rose last month.

Economists polled by Reuters had forecast housing starts slipping to a pace of 1.225 million units last month.

The housing market is being constrained by higher mortgage rates as well as land and labor shortages, which have led to tight inventories. Though house price inflation has slowed significantly, it continues to outpace wage growth, sidelining some first-time homebuyers.

Continued weakness in the sector, which is sensitive to interest rates, could be flagging a slowdown in the overall economy. Economists, however, do not expect the softening housing market will discourage the Federal Reserve from hiking rates when policymakers conclude a two-day meeting on Wednesday.

The U.S. central bank has increased borrowing costs three times this year. The 30-year fixed mortgage rate has risen more than 60 basis points in 2018 to about 4.63 percent, according to data from mortgage finance agency Freddie Mac.

“Mortgage rates have already priced in a 3.0 percent Fed funds rate more or less, so a few more Fed rate hikes won’t sting the housing market any further,” said Chris Rupkey, chief economist at MUFG in New York.

“It is important to stay on a gradual path of rate hikes or they risk telegraphing to the markets and investors that they are worried about the economic outlook.”

The PHLX housing index was trading higher, in line with a broadly stronger U.S. stock market. The dollar slipped to a one-week low against a basket of currencies amid caution ahead of the Fed’s rate decision. Prices of U.S. Treasuries rose.

HOUSING DRAG

Residential investment contracted in the first three quarters of this year, the longest stretch since mid-2009.

Homebuilding investment is expected to have declined again in the fourth quarter and the soft patch is seen persisting through the first half of 2019. Housing and trade are expected to cut into economic growth in the October-December period.

Last month, single-family homebuilding dropped 4.6 percent to a rate of 824,000 units, the lowest level since May 2017. It was the third straight monthly decline in single-family homebuilding.

A survey on Monday showed confidence among single-family homebuilders dropped to more than a 2-1/2-year low in December, with builders reporting that “consumer demand exists, but customers are hesitating to make a purchase because of rising home costs.”

Single-family starts in the South, which accounts for the bulk of homebuilding, jumped 6.8 percent last month. They tumbled 9.5 percent in the Northeast and plunged 24.4 percent in the West, probably because of wildfires in California.

Groundbreaking activity on single-family homes dropped 3.2 percent in the Midwest.

Permits to build single-family homes edged up 0.1 percent in November to a pace of 848,0000 units. These permits are now above the level of single-family starts, suggesting some pickup in homebuilding is likely.

Starts for the multi-family housing segment soared 22.4 percent to a rate of 432,000 units in November. Permits for the construction of multi-family homes rose 14.8 percent to a pace of 480,000 units. The multi-family housing segment is being boosted by demand for rental apartments.

FILE PHOTO: Single family homes being built by KB Homes are shown under construction in San Diego, California, U.S., April 17, 2017. REUTERS/Mike Blake/File Photo/File Photo

“Until the demand for owner-occupied homes rebounds, it is difficult to see why single-family starts will turn around,” said David Berson, chief economist at Nationwide in Columbus, Ohio.

Tuesday’s data also suggested that housing supply is likely to remain tight in the near term. Single-family homebuilding completions in November dropped 5.4 percent to a rate of 772,000 million units, the lowest level since August 2017.

The stock of housing under construction increased 0.7 percent to a rate of 1.148 million units last month. But the multi-family homes segment made up more than half of housing inventory under construction last month.

Reporting by Lucia Mutikani; Editing by Paul Simao

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