Housing starts roar back even as builder permits fall to 15-month low

Bloomberg News/Landov

The numbers: Housing starts ran at a 1.282 million seasonally adjusted annual rate in August, the Commerce Department said Wednesday. That was 9.2% higher than July’s pace, and 9.4% higher than a year ago.

What happened: Home builders broke ground on more homes in August, in good news for the supply-starved housing market. August’s pace beat the MarketWatch consensus of 1.249 million. But they applied for fewer permits: the 1.229 million pace of permits in August was down 5.7% for the month and 5.5% compared to a year ago. August’s pace of permitting was the lowest since May 2017.

Builder confidence is treading water this year, with sentiment unchanged in September, according to an industry group. Strong consumer demand is offset by high input costs, and new tariffs aren’t helping.

Big picture: The government’s new-home reports are based on small samples, and can be subject to large revisions. For the year to date, starts are up 6.9% compared to the same period a year ago.

In August, single-family starts edged up slightly: they were 1.9% higher for the month. Single-family permits, the metric some economists consider most critical to understanding builder activity, plunged 6.1%. Most single-family houses are built for purchase, rather than rent, so analysts view increased activity in that area a builder bet on a stronger economy and healthier consumers.

What they’re saying: “Permits have clearly faded from the cycle high 1.38 million set in March of this year, and suggest that starts will likely remain rangebound for the rest of the year,” noted Robert Kavcic, a senior economist with BMO Capital Markets. “This is consistent with our view that residential construction looks to be largely a wash on overall economic growth at this stage of the cycle.”

Stephen Stanley, chief economist at Amherst Pierpont, Securities,was more blunt: “To be clear, there is fundamental softness in housing.”

Stanley elaborated: “Industry sources suggest that the relentless torrid home price appreciation in recent years has finally reached a point that numerous prospective buyers are balking. In addition, high-end homes in high-tax states are starting to see some effect from tax law changes implemented in December. On top of that, new home construction has been impacted by a run-up in materials costs this year, squeezing builders in a vice between rising costs and a diminishing appetite of prospective buyers to pay up.”

Market reaction: Home builder stocks are under pressure this year, largely because investors fear rising interest rates will dampen buyer demand. PulteGroup, Inc. PHM, -0.54%   shares are down 19% in the year to date, while shares of D.R. Horton, Inc. DHI, -1.19%   have lost more than 15%.