Multifamily Construction Leads the Housing Market

By Robert Hughes

Housing construction activity was mixed in May as starts fell by 0.9 percent while permits for future construction rose 0.3 percent. Total housing starts dropped to a 1.269 million annual rate from a 1.281 million pace in April. The dominant single-family segment, which accounts for about three-fourths of new home construction, fell 6.4 percent for the month to a rate of 820,000 units, which extends a modest downtrend (see top chart). Starts of multifamily structures with five or more units jumped 13.8 percent to 436,000, pushing activity above the robust 300,00 to 400,000 range that multifamily starts have been in for much of the last two economic expansions (see bottom chart). From a year ago, total starts are off 4.7 percent, with single-family starts down 12.5 percent and multifamily starts up 13.8 percent.

Among the four regions in the report, total starts fell in three, the Northeast (−45.5 percent), the West (−2.4 percent), and the Midwest (−8.0 percent), while the South rose 11.2 percent. For the single-family segment, starts followed a similar pattern, falling in three regions but rising in the South.

For housing permits, total permits rose 0.3 percent to 1.294 million from 1.290 million in April. Total permits are 0.5 percent below the May 2018 level. Single-family permits rose 3.7 percent to 815,000 in May (see top chart) while permits for two- to four-family units were off 17.8 percent and permits for five or more units were down 3.7 percent to 442,000 (see bottom chart). Permits for single-family structures are down 3.3 percent from a year ago while permits for two- to four-family structures are up 8.8 percent and permits for structures with five or more units are up 4.2 percent over the past year.

The National Association of Home Builders’ Housing Market Index fell to 64 in June, down from 66 in May (see top chart). All three components of the index had declines in the latest month. The current single-family sales index fell to 71 from 72 in the prior month, expected single-family sales over the next six months fell to 70 from 72, and the index for traffic of prospective buyers declined to 48 from 49 in May.

Overall, single-family housing activity remains broadly stagnant. Both starts and permits have been in a mild downtrend in recent months. The sharp drop in mortgage rates may provide a bit of a tailwind, but there is little evidence to suggest a significant acceleration in single-family housing activity in coming months and quarters. Multifamily housing remains generally robust, sustaining activity at a high level. However, given the high level, it’s unlikely that it can go much higher.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.