Housing starts fell 4.8 percent to a 1.16 million-unit pace in July. Weakness was largely concentrated in multifamily, which fell 15.3 percent, while single-family slipped 0.5 percent. Permits fell 4.1 percent.

Single-Family Starts Better Than Monthly Print Implies

At first glance, today’s housing starts report appears to extend a weak string of monthly reports only interrupted by the downwardly-revised gain in June. Moreover, given the ebullient builder sentiment reading yesterday, weakness in housing starts and permits during the month is a bit confounding. Indeed, housing starts have fallen in five of the last six months. However, much of the weakness has been in the multifamily component, which should not be surprising given slowing fundamentals.

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To illustrate, starts are down 5.6 percent relative to a year earlier, but all of the weakness is concentrated in multifamily (5+units) which fell 35.2 percent in July, while single-family was up almost 11 percent. We find a similar trend with permits, which are forward-looking. On a year-ago basis, overall permits are up 4.1 percent, but the gain is in single-family and multifamily units with 2-4 units, while five or more units is down.

At the same time, builder sentiment jumped 4 points in August to 68, which is in line with the six-month moving average, with all components registering gains during the month. In our National Association of Home Builders/ Wells Fargo Housing Market Index write up released yesterday, we noted that single-family starts have not advanced as much as the stillelevated level of builder sentiment likely reflecting the shortage of lots and overall construction costs including labor. That said, the producer price index shows that inputs to residential construction rose 2.5 percent yearover- year in July, outpacing inflation. The shortage of labor is also putting upward pressure on construction costs and can be seen in average hourly earnings in the residential component.

Looking Ahead: The Residential Story Is Unchanged

For starters, residential lending standards are still supportive of the sector. On net, senior loan officers reported that standards for all residential real estate lending categories eased or were unchanged in Q2, while demand for most segments remained strong. Consistent with lending standards, loan growth for single-family residential (1-4 units) grew more than 11 percent in Q1 relative to a year earlier, which is more or less consistent with the pace of construction and land development loan growth. Lending for multifamily loans remained largely unchanged during the quarter.

Multifamily housing units (5+ units) completed, which reflect deliveries, were up almost 7 percent year-over-year in July. Much of the supply is still in luxury units. We continue to expect multifamily completions to peak this year, which should level off the recent moderation in asking rent growth.

The residential component of architecture billings, which is mostly apartments, jumped to its highest level in almost a year in June, intimating there is some upside.

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