Decrease in Starts Curbs U.S. Housing Rebound: Economy

David Paul Morris/Bloomberg

The decline was led by a slump in multifamily projects, which can be volatile, and the level of permits remained higher than starts, which may point to a rebound this month.

The residential real-estate rebound suffered a setback in June as housing starts unexpectedly fell to the lowest level in almost a year, curbing how much construction contributed to U.S. economic growth last quarter.
Work began on 836,000 houses at an annualized rate, the least since August and down 9.9 percent from a revised 928,000 pace in May, figures from the Commerce Department showed today in Washington. The drop was led by a 26.2 percent plunge in multifamily projects, which are more volatile than work on single-family homes.
The figures were in contrast to a report yesterday showing homebuilders this month were the most optimistic in seven years as sales improved, indicating the reversal will probably prove temporary. The slump came as Federal Reserve Chairman Ben S. Bernanke said monthly asset purchases aimed at spurring the economy could be reduced or expanded as conditions warrant, with housing one area policy makers will monitor.
“As construction ramps up, we’re bound to have some hiccups along the way,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. Having called for 915,000 starts, Lebas had the lowest estimate in the Bloomberg survey. “I don’t think this one data point is immediately concerning. The housing markets are going to be a driver of economic growth.”
In testimony before the House Financial Services Committee, Bernanke today said the central bank’s $85 billion a month in bond purchases “are by no means on a preset course.” He also said housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates.

Bernanke’s View

If the jump in borrowing costs were deemed large enough to hurt the recovery, then “the current pace of purchases could be maintained for longer,” the Fed chairman also said.
The economy maintained a “modest to moderate pace” of growth in recent weeks, the Fed said today in its Beige Book business survey.
“Residential real estate and construction activity increased at a moderate to strong pace in all reporting districts,” the Fed said in the survey, which is based on anecdotal reports from its 12 regional banks. “Manufacturing expanded in most districts since the previous report.”
Stocks climbed on Bernanke’s comments. The Standard & Poor’s 500 Index rose 0.3 percent to 1,680.91 at the close in New York, and the yield on the benchmark 10-year Treasury note dropped to 2.49 percent from 2.53 percent late yesterday. Builder shares benefited from the drop in rates, with the S&P’s Supercomposite Homebuilding Index rising 1.6 percent.

U.K. Policy

Policy makers in the U.K. rallied behind new Bank of England Governor Mark Carney, voting 9-0 to keep the central bank’s bond-purchase program at 375 billion pounds ($570 billion), according to minutes of the Monetary Policy Committee’s July 3-4 meeting issued today. The outcome was the first unanimous vote for the panel since October 2012 after two policy makers dropped their call for additional stimulus.
Bank of Canada Governor Stephen Poloz today kept his main interest rate unchanged at his first policy decision and said there will be a “gradual normalization” of borrowing costs over time as slack in the economy disappears and inflation picks up.
The median estimate of 83 economists surveyed by Bloomberg projected U.S. housing starts would rise to a 960,000 rate in June. Forecasts ranged from a 915,000 to 1.03 million after an initially reported 914,000 annualized rate in May.

Apartment Construction

Work on multifamily projects such as apartment buildings slumped to an annualized rate of 245,000 last month, the least since August 2012, following a 28.2 percent surge in May, today’s report from the Commerce Department showed.
Construction of single-family houses fell 0.8 percent to a 591,000 rate, the fewest since November, from 596,000 the prior month.
Following the report, economists at Morgan Stanley in New York cut their estimate for last quarter’s gain in residential building to an 18.9 percent annualized rate from a prior forecast of 20.3 percent. That reduced their projected increase in second-quarter gross domestic product to a 0.3 percent annualized rate from 0.4 percent.
Building permits, considered a harbinger of future work, also declined last month, again led by 21.4 percent slump in multifamily units to a 287,000 rate, the Commerce Department data showed. Applications to begin work on single-family houses climbed 0.6 percent to a 624,000 rate, the most since May 2008.

By Region

All four regions had a decrease in starts last month, led by a 12.1 percent drop in the Northeast and a 12 percent decline in the South.
Unusually wet weather may have played a role. Last month marked the 13th wettest June on record for the contiguous U.S., according to the National Oceanic and Atmospheric Administration.
Eighteen states -- from Georgia to Maine, registered rain totals that ranked among their 10 wettest. New Jersey and Delaware had their wettest Junes on record.
The drop in activity last month came even as builders gained confidence. The National Association of Home Builders/Wells Fargo sentiment index climbed to 57 in July, the highest since January 2006, the Washington-based group reported yesterday. The gauge has climbed 13 points in the latest two months, the biggest back-to-back gain since January-February 1992.

AV Homes

AV Homes Inc (AVHI). is seeing “increased demand driven by recovery in the household formation, employment, and record affordability,” chief executive officer Roger A. Cregg said in a June 19 teleconference.
“We are seeing a more robust recovery in the primary residential segment of the housing market,” he said.
Rising prices may also be prompting builders to withhold supply from the market in order to boost margins, said Drew Reading, a Bloomberg Industries analyst covering homebuilding and home improvement.
“If they’re holding off supply, they’re gaining the benefits of the higher prices, so that’s helping their margins and profitability,” said Reading. “Even though interest rates are rising, as long as demand remains strong and inventories remain low, builders can drive prices.”

Mortgage Rates

Borrowing costs remain attractive even with the recent jump. The average rate for a 30-year fixed mortgage climbed to 4.51 percent, the highest level in two years, in the second week of July, McLean, Virginia-based Freddie Mac said in a statement. The rate reached a record low of 3.31 percent in November.
The recent increase may also spur people to enter the market to lock in rates while they’re still low.
The market remains shy of the heights reached at the peak of the housing boom. Builders began work on 780,000 homes in 2012, a 28 percent increase from the prior year and the third-straight annual advance. Starts peaked at 2.1 million in 2005, which was a three-decade high.