Economic Report: Construction on new homes retreats as builders grapple with supply-chain headaches

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The numbers: Construction of new homes slowed considerably as builders contend with shortages of labor and building materials, but the demand for housing remains elevated for now.

U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.57 million in April, representing a 9.5% decrease from the previous month’s downwardly-revised figure, the U.S. Census Bureau reported Tuesday.

Compared with April 2020 though, housing starts were up 67%, though the year-over-year comparison is skewed somewhat by the effects of the COVID-19 pandemic’s onset a year ago.

The pace of permitting for new housing units increased again in March. Permitting for new homes occurred at a seasonally-adjusted annual rate of 1.76 million, up 0.3% from March and 61% from a year ago.

Economists polled by MarketWatch had expected housing starts to occur at a pace of 1.70 million and building permits to come in at a pace of 1.77 million.

What happened: Single-family housing starts and permits declined on a monthly basis, by 13% and roughly 4% respectively. The decline in single-family starts outweighed a 4% increase in multifamily starts. Permits for buildings with five or more housing units also increased.

A slowdown in new-home construction in the Midwest drove much of the decline — though housing starts also decreased in the South. Both the Northeast and West saw an uptick in housing starts, though single-family starts declined or remained flat in every part of the country last month.

Home completions fell more than 4% on a monthly basis in April.

The big picture: The factors that contributed to the strong demand for new homes remain in place, as was evidenced by May’s report on home builder confidence. Demographic shifts and the pandemic have created more interest in homeownership — and that interest is being stoked even further by low mortgage rates. A shortage of existing homes for sale, however, is pushing more people into the market for new homes, as evidenced by the continued improvement in building permits.

But a look at Census Bureau data on the number of homes that were permitted but not started hints at the more pressing issue at hand: This figure increased 5% between March and April.

“After weather effects downwardly distorted February’s figure, there was always a feeling that March’s print represented an overshoot of the underlying trend as builders caught up on projects that were delayed by the weather,” said Andrew Grantham, a senior economist with CIBC Capital Markets.

“However, the deceleration in April was more pronounced than expected and is likely a sign that shortages of some materials, particularly lumber, and potentially labor as well, are impacting building activity,” Grantham added.

What they’re saying: “Overall, we think building activity for new, single-family homes will remain supported by low inventories of new and existing homes and still-positive demand. However, rising input costs and a lack of availability are boosting prices, a headwind for affordability,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in a research note ahead of the report’s release.

“Building permit issuance tends to track new home sales, but developers will be aware that mortgage demand has fallen sharply, likely depressing future sales,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note released before the housing starts report.

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