Housing Permits Pick Up in May, Outlook Improving – Robert Hughes (06/18/2020)

Housing activity improved modestly in May as starts and permits posted gains. However, the results were uneven across the major regions. Nevertheless, low mortgage rates and easing lockdown restrictions are giving a boost to homebuilder confidence.

Total housing starts rose to a 974,000 annual rate from a 934,000 pace in April, a 4.3 percent increase. The dominant single-family segment, which accounts for about two-thirds of new home construction, rose 0.1 percent for the month to a rate of 675,000. Starts of multifamily structures with five or more units increased by 16.9 percent to 291,000. From a year ago, total starts are down 23.2 percent with single-family starts off 17.8 percent and multifamily starts down 33.1 percent.

Among the four regions in the report, total starts fell in two, the South (−16.0 percent) and the Midwest (−1.5 percent), while the Northeast gained 12.8 percent and the West surged 69.8 percent. For the single-family segment, starts fell in the South (−6.9 percent) and the Midwest (−16.0 percent), while the Northeast increased 63.6 percent and the West jumped 21.5 percent.

For housing permits, total permits rose 14.4 percent to 1.220 million from 1.066 million in April. Total permits are 8.8 percent below the May 2019 level. Single-family permits were up 11.9 percent at 745,000 in May (see top of first chart) while permits for two- to four-family units gained 24.2 percent and permits for five or more units increased 18.3 percent to 434,000. Combined, multifamily permits were issued at a 475,000 pace versus 400,000 in April (see top of first chart). Permits for single-family structures are down 9.9 percent from a year ago while permits for two- to four-family structures are up 10.8 percent and permits for structures with five or more units are down 8.4 percent over the past year.

Permits rose across all four regions in the report, with the South, the largest region by volume, up 7.7 percent, the West posting a 12.3 percent rise, the Midwest gaining 18.4 percent and the Northeast surging 82.0 percent (see second chart). From a year ago, the South is up 14.3 percent, the West is 16.7 percent higher, the Midwest gained 20.3 percent and the Northeast surged 34.6 percent.

Home construction activity was mixed in May as lockdown restrictions impacted both construction workers and potential customers. However, mortgage rates are near all-time lows (see bottom of first chart) and should provide some support as lockdown restrictions ease. That potential likely helped boost the Housing Market Index, a measure of builder confidence from the National Association of Home Builders. The composite Housing Market Index posted a second monthly gain in June, rising to 58 from 37 in May and 30 in April. In February, before the worst of the pandemic and implementation of lockdown restrictions, the index was at 72, and above 70 for the sixth consecutive month (see bottom of first chart). The index rose in all four regions in June.

Like many parts of the economy, housing is rebounding from severe declines following the implementation of lockdown restrictions in response to the rapid spread of COVID-19. Housing is one of the areas that may face structural changes if buyers and renters develop permanent changes to their housing preferences. If it is believed that higher density living represents a higher risk in future pandemics, then there may be some added demand for less dense suburban and rural housing. This trend could be boosted if businesses implement permanent work from home policies, to make employees happy but also to cut down on high-cost commercial real estate, especially in high density, high cost cities.

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