After Harvey and Irma disrupted homebuilding activity during August and September homebuilders came back in full force in October. Housing starts rebounded (+155k) to 1,290k, surpassing consensus expectations for a tick up in activity to 1,190k. Building permits also surprised to the upside, rising by 72k to 1,297k.

The good news was amplified by positive revisions to last month’s report, with single family starts rising (+44k) to 877k from an upwardly revised (+4k) September reading. The more volatile multifamily segment accounted for the bulk of the increase, rising by 111k to 413k from an upwardly revised (+4k) reading in September.

The number of building permits issued, a good forward-looking indicator of starts, also rose with single family permits up 16k to 839k and multifamily permits 56k higher at 458k.

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Activity in the South rebounded strongly (+91k), as hurricane-related rebuilding begun. The Northeast (+43k) and the Midwest (+33k) also saw activity rise, while homebuilding the West subsided (-12k).

Key Implications

This was a good report overall with the pick-up in activity, particularly in the South, confirming that the previous months’ lull in activity was fully related to hurricane disruptions and was thus temporary. While the rebound was skewed to the multi-family segment, single-family homebuilding also increased, matching its post-recession record high of 877k achieved in February 2017. Importantly, building permits also rose in October, with robust permitting activity likely to support homebuilding in the months ahead.

Fundamentals in the housing market remain strong, with persistent wage gains and still-low mortgage rates continuing to support demand. The single-family segment, in particular, is set to benefit as the pace of household formation rises alongside positive labor market developments. Builders echoed an optimistic sentiment in November, as hurricane-related uncertainty faded and led the NAHB’s index to a level just shy of reaching a post-recession high.

Having said that, builders will continue to face challenges in the coming months, stemming from a dwindling pool of labor. An increase in demand in the South for construction workers related to hurricane-related rebuilding efforts could put a strain on builders in other regions. This will likely lead to rising costs for the homebuilders related to both labor as well as building material costs already lifted by Canadian softwood tariffs.

Builders will likely pass on some of the rise in costs to consumers in the form of higher home prices. This could hinder demand in the near- to medium-term alongside the potential for the elimination of mortgage interest deduction currently debated in Congress. Still, given the solid fundamentals, we expect homebuilding to continue to grind higher over the medium-term, with residential investment being a positive contributor to growth in the coming quarters.


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