Economists have mixed feelings on latest housing starts report

April 20th, 2015

Homebuilders are confident March's dip in residential construction isn't indicative of a negative trend.

The U.S. Department of Commerce and Department of Housing and Urban Development released their joint report for March housing production, and economists have varying opinions on the data. Some are calling the performance lackluster, while others believe the activity doesn’t signal bad news.

What the report found
Residential construction figures for March provided mixed results, with a combination of increases and declines. For instance, overall building permits went up compared to March 2013 but dropped compared to February of this year.

Housing starts were the key focus for economists and rose 2 percent month over month to 926,000 units. Yet, they fell on a yearly comparison. According to Reuters, economists predicted a rise to 1.04 million units. Not only did the monthly gain underperform based on these expectations, but they weren’t enough to offset declines seen in February as a result of harsh weather.

Overall housing completions did little to ease concerns. This segment of production had month-over-month and year-over-year declines in March.

March data doesn’t tell the whole story
Analysts have a consensus that March residential construction figures weren’t the best, but some believe the data is only a small setback when considered with larger trends, according to The Wall Street Journal. The key to understanding the upsides of construction activity is to look at the first quarter of 2015.

Heavy snowfall rocked the U.S. – especially the Northeast – during the tail end of winter. Despite these setbacks, single-family housing starts jumped 4.4 percent in the first quarter compared to the same period last year. Additionally, permits improved 5.5 percent.

Not only are economists optimistic about production in the first quarter, they are looking forward to more robust housing activity, including sales and construction, as the temperatures continue to rise.

“I expect single-family construction to pick up significantly this spring and summer,” said Moody Analytics Chief Economist Mark Zandi, according to the Journal. “Mortgage credit is slowly becoming more available, and as the job market approaches full employment, wage growth will pick up.”

Builders are also optimistic
The National Association of Home Builders (NAHB) also commented on the housing production data, acknowledging that some factors keep potential homebuyers on the sidelines and expressing confidence conditions will become more favorable.

“Builders are being careful not to add inventory beyond expected demand, especially as they struggle with increasing costs for lots, labor and materials,” said David Crowe, the NAHB’s chief economist. “However, pent-up demand, low mortgage interest rates and a growing economy should keep the housing industry moving forward throughout the rest of the year.”

This builder optimism in improved housing activity over the coming months is also evident in the latest NAHB/Wells Fargo housing market index (HMI). The indexes for future sales expectations and buyer traffic both saw month-over-month gains.

“As the spring buying season gets underway, homebuilders are confident that current low interest rates and continued job growth will draw consumers to the market,” said Tom Woods, NAHB chairman.

The market isn’t slowing down
The NAHB comments and HMI show homebuilders aren’t at all worried about residential construction or their sales numbers despite what certain economists think. Slow activity at the beginning of any year is not uncommon, and the brunt of sales and construction kick off in spring and summer once the weather warms up.

Furthermore, current economic conditions are conducive for more improvements, according to Reuters. Americans who have been out of work for a long time are finding well-paying jobs, which gives them encouragement to look into new housing. As lending standards become more favorable and consumers have more income, builder expectations may come to fruition.