US housing starts dip 2.8 percent in October, but market grows stronger

Starts for U.S. single-family homes rose for a second straight month in October and overall building permits approached a 6-1/2-year high, suggesting the housing market was still on a recovery path.

The Commerce Department said on Wednesday groundbreaking for single-family homes, which account for more than two-thirds of the housing market, increased 4.2 percent to a seasonally adjusted annual 696,000 unit pace, the highest since last November.

Single-family starts in the U.S. South, where more than half of that segment's construction occurs, increased to their highest level since April 2008.

But a 15.4 percent plunge in the volatile multi-family homes part of the market caused overall groundbreaking to fall 2.8 percent to a 1.009 million-unit pace.

"Multifamily starts have traditionally been the more volatile component of housing starts, and recently their share in total starts has increased, leading the headline measure to become more volatile," Barclays Research economist Blerina Uruçi wrote in an e-mailed analysis. "This makes it more difficult to gauge the underlying trend in the series and, consequently, the progress in the housing market recovery. Housing permits data showed a sharp in increase in multifamily permits for October, suggesting the sharp fall this month is likely to be reversed in November."

"Smoothing over the monthly volatility of the data, the underlying trend remains one of a gradual upward trend in housing starts supported by single family units," she continued. "We maintain our view that housing activity continues to recover, although the pace of the recovery remains slower than in the previous couple of years, owing to the decline in housing affordability. However, the improvements in the labor market and household income are likely to offset its effect and to continue supporting the improving trend."

September's starts also were revised to a 1.038 million-unit rate from the previously reported 1.017-million unit pace.

Although the housing recovery is likely to remain subdued given sluggish wage growth and still-stringent lending practices by financial institutions, the strong gains in single-family starts suggest home building will contribute to gross domestic product in the fourth quarter.

The segment added nothing to GDP in the July-September period.

"The theme in housing market activity remains one of gradual improvement as underlying fundamentals continue to pick up," said Gennadiy Goldberg, an economist at TD Securities in New York. 

A separate report from the Mortgage Bankers Association showed applications for loans to purchase homes surged last week as low mortgage rates lured potential buyers.

Last month, building permits jumped 4.8 percent to a 1.080 million-unit pace, the highest since June 2008. It was the second straight month of gains in permits, which lead starts.

Permits for single-family homes rose 1.4 percent to a 640,000-unit pace. Permits for multi-family housing surged 10 percent to a 440,000-unit pace.

Yields on U.S. Treasury 10-year notes and 30-year bonds hit session highs after the data and U.S. stocks futures were pointing to a weaker open. But Lowe's Cos Inc was up about 3 percent in premarket trading after the No. 2 U.S. home improvement products retailer raised its full-year profit and sales forecast.