On Thursday morning we saw that housing starts unexpectedly plunged 9.3 percent to an annualized rate of 893,000. On the face of it, the report was ugly, considering all the talk about the recent housing snapback.
It's important to note that the miss was entirely due to one region: the South. Housing starts plunged 29.6 percent in the South, driven by weakness in single-family units. "All the hit is in the south, where starts plunged by 29.6 percent, the biggest ever monthly drop, despite gains in each other region," wrote Ian Shepherdson at Pantheon Macroeconomics.
Starts were actually up in the rest of the country. In the Northeast, housing starts were up 14.1 percent, driven mostly by multifamily starts. In the Midwest they were up 28 percent, and in the West they were up 2.6 percent.
It wasn't immediately clear what was behind the sudden plunge in the South. "But homebuilders are being constrained by a shortage of labour and lots," Paul Diggle at Capital Economics. "Labour shortages are particularly prevalent in the carpentry and framing trades required at the start of the construction process. And shortages of lots mean that land prices are rising more quickly than the historical relationship with house prices would suggest." While the headline was weak, Eric Green at TD Securities wrote that "the report is exceptionally uneven and on balance is not an indication of a significant turn in housing construction."
During her semiannual monetary policy report this week, Federal Reserve Board Chair Janet Yellen said the housing sector hadn't shown much progress. "While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing," she said.
While this report has been disappointing, economists do point out that single-family details were actually better than multifamily starts. And Shepherdson argues that this correction was expected after "May starts overshot the pace implied by building permits."
"It's probably just noise," Shepherdson told Business Insider in an email. "Single-family permits are the best guide to activity and they rose 2.6 percent in May and have recovered most of the winter hit. I don’t expect significant further gains, but equally I’m not looking for further declines after the terrible-looking June headlines."
Bottomline: The report is ugly no doubt, but we'd urge caution with interpreting these volatile numbers.
Michael McDonough, global head of economics at Bloomberg, tweeted this chart that shows a breakdown of housing starts by region.