00:07 GMT +319 October 2019
Listen Live
    This Thursday, June 8, 2017, photo shows a new home under construction, in Miami Springs, Fla.

    US Residential Construction Suddenly Slows in July Amid Weak Demand

    © AP Photo / Alan Diaz
    Get short URL
    0 40

    The US housing market unexpectedly slowed in July, weighed down by high home prices, high borrowing costs, overregulation, the rising costs of materials and the lack of skilled labor and land.

    Kristian Rouz – US housing starts underperformed in July as weak consumer demand for single- and multi-family properties, as well as harsher financing conditions, hampered builder sentiment. Despite a strong labor market and an expansion in mortgage issuance, new homes face declining demand due to high property prices and weakening household disposable incomes.

    A rebound in the housing sector is possible in August due to the expected gains in salaries and wages. However, a weak start of the third quarter in construction might subtract points from the Q3 GDP.

    According to a report from the Commerce Department, US homebuilding suddenly fell in July, with housing starts having dropped 4.8 percent year-on-year to 1.16 mln units compared to 1.21 units the previous month. June’s reading was also revised lower from the initially posted 1.22 mln units.

    An English ten Pound note is seen in an illustration taken March 16, 2016
    © REUTERS / Phil Noble/Illustration/File Photo
    Even though mortgage rates are still compressed at below the 5-percent threshold, currently at 4.11 percent for a 30-year fixed loan, the higher base borrowing costs, at 1.00-1.25 percent, have affected the builders’ financing capabilities. This credit crunch has thus affected both the supply and the demand side, producing the market slowdown.

    The data curbs expectations of an across-the-board housing market rebound in the third quarter, initially expected due to the quicker pace of economic expansion in the previous quarter.

    "Soft July starts following on June's solid reading is a disappointment, as we had expected housing to pick up more robustly from a soft second quarter," Andrew Labelle of New York-based Citigroup said. "Still, we are inclined to look through some of the pullback as it was concentrated in generally lower value and more volatile multi-family."

    Overall, homebuilding declined by 5.6 percent year-on-year, and the issuance of building permits dropped by 4.1 percent. Single-family home-building, the sector mainly driven by still-robust mortgage loan issuance, retreated by only 0.5 percent to a total of 856,000 units in July. However, it was the slump in the multifamily segment that hampered the broader construction sector.

    Apart from the higher interest rates, builders cite a lack of labor and land as reasons for the decline in housing. Framers are hard to find amongst the available workforce, and buildable lots are scarce due to zoning and overregulation in most US metropolitan areas.

    Rising home prices affect the demand-side of the market, and many homebuyers are opting to purchase pre-owned homes.  Material costs have risen due to NAFTA-related volatility, affecting imports of lumber from Canada, meaning the input costs on the supply side are higher, pushing prices up.
    The weakening housing market slashed 0.27 percent off the Q2 economic growth, and recent developments suggest the construction drag on the US economy is poised to continue into the current quarter.

    The US historic average for housing starts is 1.5 mln, and the currently underperforming market suggests the economy is not strong enough to support the broad-based acceleration the Trump administration had hoped for. The amount of completed homes also dropped 6.2 percent in July, to 1.18 mln units.

    "We expect residential investment to keep moving up over time, although we believe the pace of growth will be modest," Daniel Silver of New York-based JPMorgan Chase & Co. said.

    This month, homebuilder sentiment increased to its highest point since May, as the construction sector is expecting a resurgence in demand for houses as the holiday season draws to its end. According to a report from Wells Fargo and the National Association of Home Builders (NAHB), buyers seem to be more inclined to pay the premiums for new houses.

    "This is due to ongoing job and economic growth, attractive mortgage rates, and growing consumer confidence," the Kerrville, TX-based NAHB Chairman Granger MacDonald said.

    However, the NAHB cite the overregulation on the federal, state, and especially local levels as the reason holding back the expansion in construction.

    The housing market is thus poised to become more consumer-friendly. The NAHB-reported an abundance of supply in multi-family homes happening in the market, driving vacancy levels higher, meaning declines in rents and flat prices could be just around the corner. Overbuilding in the multifamily segment has produced a massive decline in ground-breaking in this segment, crashing 17.1 percent in July to its lowest point since September 2016.


    Trump Gets Little Credit for US Economic Rebound, Surge in Employment - Poll
    US Sanctions on North Korea Are 'Economic Aggression Aimed at Regime Change'
    Ukraine's Move to American Thermal Coal to Boost US Economy - White House
    loan, housing, interest rate, United States
    Community standardsDiscussion
    Comment via FacebookComment via Sputnik