U.S. housing starts and building permits (July)

U.S. housing starts rose 0.2% in July, the second increase in a row but below expected, to 1,206,000 units annualized, still the highest since October 2007. (There were upward revisions to the prior two months, especially to May.) But watch for some pullback in coming months, as building permits took a 16.3% dive (the most since 2008) to 1,119,000 units annualized.

There was a big special factor in play during July. Activity in the Northeast had been running higher in advance of the June 15th expiration date for the "421a tax exemption program" in New York, which benefited developers. Building permits surged in March, April and May (+64.6% in May alone) as builders rushed to get approvals. In order to benefit from the program, builders had to have approvals in place, and construction begun, before the June 15th deadline. (That program has since been extended.) So the reversal in July was expected. Starts in the Northeast were down 27.5%, and permits took a 60.2% flying leap last month.

But outside of the Northeast, activity was solid. Excluding that region, starts jumped 6.4% in July to 1,045,000 units, the highest since November 2007. And although permits were down 4.5%, they are still at their 2nd highest level in eight years. In other words, the underlying trend outside of the NE is very strong. Plus, note that nationwide starts of single-family homes are up 19% y/y to eight-year highs, and +10.9% YTD.

"There will be fewer starts in the next few months. But remember that homebuilders haven't been this chipper in a decade (the NAHB index hit its highest level since November 2005 this month). And although that is not a perfect indication of future construction activity, the underlying trend in starts looks very favorable, and that should continue with the support of job growth and still-low borrowing costs", says BMO Economics.