US Housing Starts Drop to One-Year Low in September

As we noted last month, the effects of Hurricanes Harvey and Irma on US homebuilding would be evident in September’s numbers. Per the most recent data from the US Census Bureau, US housing starts dropped to a one-year low in September as the two storms interrupted construction in the South. Homebuilding plummeted more than 9 percent in the South—which accounts for nearly half of the nation’s homebuilding—to the lowest level since October 2015. Single-family starts in the region dropped more than 15 percent to more than a one-year low.  

“September’s drop in starts underscores the importance of Florida and Houston,” said Mark Vitner, a senior economist at Wells Fargo Securities.

Housing Starts, Permits & Completions

US housing starts dropped 4.7 percent to a seasonally adjusted annual rate (SAAR) of 1,127,000 units in September. Single-family starts accounted for 829,000 units, which is 4.6 percent below the revised August figure of 869,000.  Starts for the volatile multi-family housing segment fell 5.1 percent to a rate of 298,000 units. “The one-month fall in new home construction, especially in the South region in light of Hurricane recovery, is understandable,” said Lawrence Yun, National Association of Realtors chief economist.

Privately-owned housing authorizations decreased to 1.22 million in September, which is down 4.5 percent from 1.27 million in August and 4.3 percent from 1.27 million in September 2016. But single-family authorizations increased, rising 2.4 percent to 819,000, up from 800,000 authorizations in August.

Privately-owned housing completions increased to a SAAR of 1.11 million in September, up 1.1 percent from August’s revised estimate of 1.1 million and 10.3 percent over September 2016. Single-family completions also increased, posting a 4.6 percent rise from August’s rate of 747,000 to 781,000 completions in September. Regional performance in September was largely disappointing, however, as confirmed by the US Census Bureau report. Seasonally-adjusted housing starts by region included:

• Northeast: -9.2 percent
• South: -9.3 percent
• Midwest: -20.2 percent
• West: +15.7 percent

Mortgage Rates & Key Indicators

The 30-year fixed mortgage rate dropped from 3.88 to 3.81 percent, its lowest level of 2017 and lowest level since November 2016. The National Association of Home Builders (NAHB)/Wells Fargo builder sentiment index jumped four points from last month’s number to 68 in October.

While the hurricane activity had a significant impact on housing starts across the US South, the decline in building permits is most troubling for economists and industry analysts; the downward trend is raising concerns that the housing market recovery could be stalling as homebuilding remains well below its peak prior to the great recession in 2008. “Residential construction should be a hefty drag on third-quarter GDP growth,” said Michael Gregory, deputy chief economist at BMO Capital Markets in Toronto. “Housing activity has shifted from leading the economic expansion to now just following it, at best.”

Even before the rapid succession of hurricanes, residential construction had virtually stagnated this year due to shortages of land and labor, as well as rising costs of building materials. Lumber prices alone have remained on the historically high side this year; Forest2Market’s composite southern yellow pine lumber price has averaged nearly $400/mbf through 2017.

However, despite the recent numbers (driven in part by natural disasters) and economic headwinds, housing market fundamentals nevertheless remain solid. Unemployment is at a 16-year low of 4.2 percent, wages are rising and mortgage rates remain near historic lows. Economists expect housing starts to rebound in the fourth quarter, but they caution that rebuilding in Texas, Florida and fire-ravaged California will likely reroute labor away from other construction projects.

Based on these events, clarity on the direction of the entire housing market will likely be delayed for at least the next few months; it may be 1Q2018 before we begin to see the full impact that the devastating hurricanes and wildfires have had on the market. Global investment banking firm Jefferies noted that, “…housing construction and sales data is very likely to be muddled in the months ahead as regions that were damaged by the hurricanes first clean-up and then rebuild. We had expected that this month’s start data would show evidence that the rebuilding process has begun, but the weakness in starts and permits, combined with the strength in the October NAHB index relative to September suggests that we will get a surge in activity next month at the earliest.”