Housing starts gain steam as builders ramp up construction despite pandemic

New home construction activity increased 17% between May and June

The numbers: Housing starts occurred at a 1.19 million seasonally adjusted annual rate in June, the Commerce Department said Friday, representing a 17% increase from May.

Permitting activity for newly-built homes rose 2.1% between May and June to a seasonally adjusted annual rate of 1.24 million.

Housing starts nearly met the consensus forecast of economists polled by MarketWatch — they estimated new home construction to take place at a 1.2 million-unit annual rate. Building permits fell slightly short of economists’ consensus forecast of 1.3 million.

What happened: Compared with a year ago, housing starts were still down 4%. However, on a monthly basis, construction activity rose for both single-family properties (up 17.2%) and multifamily buildings (up 18.6%).

 
 

The Northeast saw the biggest pick-up in activity by far, with housing starts rising 114%. Construction activity increased by smaller amounts in the Midwest and the South and dropped slightly in the West.

On the permitting side, the number of single-family units authorized rose by nearly 12% between May and June. For building with five or more units, permits fell 14% on a monthly basis.

Compared with a year ago, permits were down 2.5% overall.

Big picture: The home-building sector has marked a big turnaround from just a few months ago, when construction activity dropped to the lowest level in five years.

A couple of factors are driving the rise in home building. Mortgage rates are at all-time lows — just this week, the average rate on the 30-year, fixed-rate mortgage fell below 3% for the first time since Freddie Mac FMCC, -1.00% began tracking the data in the 1970s.

Low mortgage rates are encouraging buyers to come off the sidelines and re-enter the housing market. However, the supply of existing homes remains extremely constrained. Even before the pandemic there was a shortage of homes available for sale — but many sellers have refrained from listing their property out of fear of the coronavirus-fueled economic turmoil. As a result, home builders have a captive audience of interested buyers.

 

“Builders are clearly reading the market and understand the need for new homes to match overwhelming demand,” said Bill Banfield, executive vice president of capital markets at Quicken Loans RKT, . “Today’s report indicates builders are confident consumers will purchase new homes in this era of rock-bottom mortgage rates, despite the high unemployment numbers and other negative economic reports.”

There are some headwinds facing home builders and buyers, though. The price of lumber has jumped significantly in recent months because of supply shortages, which is squeezing builders’ margins and threatening to push prices up. And the surge in COVID-19 cases in many parts of the country has led states to consider scaling back their economic reopenings, which could lead to buyers staying home again.

What they’re saying: “The housing market is proving to be one of the more resilient sectors of the economy,” Sal Guatieri, senior economist at BMO Capital Markets, wrote in a research note.

“The features home buyers are seeking after the pandemic quarantine — bigger homes, new kitchens, home offices and access to the outdoors — are more readily available in the suburbs, as well as mid- and small-sized cities within commuting distance of downtown centers,” said George Ratiu, senior economist at Realtor.com. “Home builders are in a solid position to respond to these shifting preferences, especially when considering the shrinking inventory of existing homes for sale.”