U.S. housing outlook remains bright

U.S. housing starts pulled back to 1.036 million annualized from an upwardly revised 1.165 million in April, falling shy of expectations for a more modest pullback to 1.09 million. Offsetting the disappointment, April and March starts were revised up by a combined 40 thousand. Building permits surged to 1.275 million annualized, from 1.14 million in April, exceeding expectations.

While somewhat disappointing, the pullback in starts was largely expected with April's numbers lifted by the delayed projects during the February and March period. This notion is further corroborated by the fact that the regions that experienced the largest gains during April saw the most pullback in May.

Still, given the superb pace of building permits in May - which was the highest since August 2007 - the future looks bright for the homebuilding sector. Housing starts typically lag building permits by one to three months, with builders likely ramping up the pace of groundbreaking substantially this summer. An upbeat homebuilder confidence index makes this summer all the more likely to register the fastest pace of homebuilding of the recovery.

"U.S. housing outlook remains bright. Residential construction should contribute robustly to second quarter growth, which we expect may grow by 2.9% after a lackluster start to the year. And while skewed towards multiples, single-family construction is also rising, and should pick up as further labor market and income gains manifest. Risks remain, with the Federal Reserve inching closer to a rate hike which may come as early as September, but given the likelihood of only gradual rises in rates, housing should continue to improve over the medium term." said TD Economics