May Housing Starts and Permits

KEY DATA: Starts: -11.1%; 1-Family: -5.4%; Multi-Family: -20.2%/ Permits: +11.8%; 1-Family: +2.6%; Multi-Family: +24.1%

IN A NUTSHELL: “Surging permit requests indicate that builders will be really busy this summer.”

WHAT IT MEANS: Housing starts fell sharply in May. Boo hoo. Enough of the crocodile tears. The housing market is coming back and it looks like it will be with a vengeance. Yes, construction activity slipped and while the declines were largely in the volatile multi-family component, single-family activity was off solidly as well. All regions saw less construction than in May with the biggest drop being in the Northeast. A pick up in single-family activity in that part of the nation was more than offset by a nearly 40% decline in multi-family activity. While the drop in housing starts would seem to be worrisome, it really isn’t. That is because permit requests soared to its highest pace in nearly eight years. For the past three months, permits are running nearly ten percent above starts and one thing we know, builders don’t waste money on permits unless they expect to use them. The gap between permits and starts will be narrowed and that points to an awful lot of construction across the entire nation during the summer.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is starting its two-day meeting and all eyes will be focused on tomorrow’s statement, forecasts and press conference. Thus, any reaction to this report should be muted. But have not doubt, despite the sharply negative headline housing starts number, the details of this report indicate the housing market is in very good shape. Second quarter housing starts are up about 12.5% from the first quarter monthly average and that rise is likely to be above 15% once we get the June data. Residential construction is likely to add significantly to second quarter growth. With the trade deficit no longer widening, business investment improving and households buying vehicles like crazy, the GDP number could come in a lot better than most expect. Investors need to recognize that while a rate hike tomorrow looks to be off the table, the economy is already strong enough to support one at any meeting in the future. The message that I suspect will be sent tomorrow is that if the data continue to show improving economic conditions, a move up in rates would be warranted. Since the consensus is for a hike in September and there is a press conference that month, barring some really bad data or a major international crisis, that is when the first rate increase in a decade should occur.