U.S. Housing Starts and Permits (July 2021)

Housing starts retreat in July, but trend remains healthy

• Housing starts fell 7% (or 116k) to 1.53 million units (annualized) in July. The headline number came in below expectations, which called for a more moderate pullback to 1.61 million. Upward revisions to the prior two months added 55k to the overall tally. 
• Starts in the single-family segment fell 4.5% (or 52k) to 1.11 million, while starts in the multifamily segment fell 13.1% (or 64k) to 423k.  
• Permitting activity recorded its first gain in three months, rising 2.6% to 1.64 million. The multifamily segment, where permits rose 11.2% to 587k was entirely responsible for the increase. Single-family permits, meanwhile, fell 1.7% to 1.05 million, retreating for the fourth consecutive month.
• Housing starts fell across most regions, with a continued improvement in the South (+2.1%) the only exception. Declines were led by the Northeast (-49.3%), followed by the West (-11.3%) and the Midwest (-6.9%).           

Key Implications

• A pullback in housing starts in July was widely expected given that permitting activity (a leading indicator for starts) had fallen in each of the three months prior. Despite this, the overall pace of new homebuilding remains relatively healthy, with the six-month moving average still above the pre-pandemic trend at close to 1.59 million.  
• The smaller multifamily market has contributed to the healthy pace of homebuilding, with starts in the segment generally trending higher over the last several months thanks to improving public health conditions and better prospects for dense urban living. The recent surge in multifamily permits suggests that the pullback in starts experienced in July may be short lived. But, the latest Delta-driven COVID-19 wave could still pose a near-term hurdle for the segment.
• Rising material costs and a shortage of qualified labor, coupled with buyers' affordability challenges add to concerns for builders. Builder sentiment in the larger single-family market has eased gradually in recent months. Nonetheless, the fundamentals for homebuilding remain solid, thanks to an improving labor market backdrop and still exceptionally low inventory levels. A recent easing in mortgage rates and a pullback in lumber prices (the latter have fallen sharply since peaking in mid-May and are now back to pre-pandemic levels) are also expected to provide support.     

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