Housing starts fall in June, but there's a silver lining

Housing starts fell sharply in June, with US builders starting work on fewer single- and multi-family homes. But there was some good news for the housing recovery: Permit applications for single-family homes hit a five-year high.

As home prices accelerate and demand among real estate buyers ramps up, one aspect of the housing recovery has lagged: new home building. That continued in June, but there's at least one promising sign that the construction sector may be turing a corner. 

Housing starts dipped 9.9 percent in June to an annualized pace of 836,000 homes. That's well below 960,000 annualized pace that analyst expected. May's housing starts pace, meanwhile, was revised upward, from 914,000 to 960,000 homes. 

Most of the decline came in construction of multi-family homes, a volatile sector month to month that plunged by 26.2 percent in June. Builders are now on pace to build 245,000 multi-family homes by the end of the year. But single-family starts edged down last month as well, decreasing 0.8 percent to an annualized rate of 591,000 units.   

"This was a disappointing update," IHS Global Insight economists Patrick Newport and Stephanie Karol wrote in an e-mailed analysis. "Housing starts – both single-family and multifamily – dropped in June and both were down in the second quarter. And multifamily permits are slowing – indeed, the three-month moving average declined in June...Builders are still not putting up enough homes. Far from it. By our estimate, underlying demand is running close to 1.4 million."

A rainy June in many parts of the country may have contributed to the slowdown – 18 states had one of their ten wettest Junes on record, according to the National Climatic Data Center. But there's a silver lining: the starts figures are largely disappointing within the context of the housing market's robust rebound over the past year. Total starts are up 10.4 percent since June 2012, and single family homes are up 11.5 percent. The National Association of Homebuilders' Housing Market Index (HMI) jumped six points to 57 in July from 51 in June, its highest level since January 2006. And applications for permits to build single-family homes rose for the third month in a row, hitting 624,000 – the highest number in over five years.

"We believe that the broader trend of improvement should continue despite volatility on a month-to-month basis," Barclays Research economist Cooper Howes wrote via e-mailed analysis. "That being said, multi-family permits have declined for three consecutive months, and we will be monitoring this trend to see if higher mortgage rates are weighing down activity."

Nevertheless, it's important to note that current housing conditions, while markedly improved from a year ago, are still far from normal. "Total starts are still 63 precent below their January 2006 peak, and single family starts are down 68 percent from their peak reached in the same month," MFR, Inc., chief economist Joshua Shapiro wrote in an e-mail report.