Housing Starts Sink as Inventory Problem Persists

Home construction sank in August as the domestic real estate market continues to be bogged down by tight inventories, according to a report published Tuesday by the Census Bureau.

The 1.14 million building permits authorized last month was down 0.4 percent over the month and 2.3 percent over the year. The 1.04 million residential construction projects completed, meanwhile, was down 3.4 percent from July but up 8.3 percent from August 2015.

And the 1.14 million housing projects started last month was down 5.8 percent and up only 0.9 percent over the year. Starts in July surged to a five-month high in last month's report, so analysts widely expected construction activity to pull back slightly. But the 5.8 percent drop is significantly more than many expected to see.

"Strength in homebuilder sentiment, still-low mortgage rates and accommodative lending standards suggests there is still room to grow," Sam Bullard, a managing director and senior economist at Wells Fargo Securities, wrote in a research note Sunday, predicting that starts would "pull back slightly in August."

But the lackluster construction data published Tuesday doesn't bode particularly well for a real estate sector that's already plagued by an inventory shortage. The number of available housing options out on the market has not been able to keep up with demand, in effect driving up home values in some areas while restricting the options of first-time homebuyers.

A surge in home construction could help alleviate some of that pressure, but Tuesday's report showed little evidence of such progress.

"With both employment and income growing strongly at a time when inventory is falling, it's up to homebuilders to help ease demand pressures," Ralph McLaughlin, chief economist at real estate hub Trulia. "While not a silver bullet, increases in homebuilding should help moderate price and rent increases headed into the fourth quarter." 

Single-family home construction – as opposed to multi-family units like apartment buildings – has plugged along respectably in recent months. Single-family building permits actually climbed 3.7 percent over the month, while such completions were down only 0.3 percent.

Single-family starts, though, were down 6 percent to their lowest level since October 2015.

"New housing starts slowed in August, but the 12-month rolling total of starts – which is a less volatile measure of new construction activity – grew 7.5 percent year-over-year in August to 1,157,300 starts," McLaughlin said, indicating that America's real estate metrics weren't nearly as dreary over the course of the last year.

Indeed, he indicated the rolling total of single-family starts is actually up 9.1 percent since August 2015, while the multi-family category has seen 4.9 percent growth. He notes that homebuyers are still "stymied by low inventory," but that the considerable drops seen in August's housing metrics aren't necessarily indicative of a broader decline.

That said, he said the country still has "a long way to go to meet historical norms."

"While it's tempting to compare August housing starts to pre-recession peaks, homebuilders arguably built too many homes during this period. A better norm is the 50-year average, of which we're still about 20 percent below, McLaughlin said. "While gains are slowing, the rising level of starts reflects a healthy combination of homebuilder confidence and sustained demand for homes during a time of solid job and income growth."