Housing Starts Fall Unexpectedly in November

Total housing starts fell 1.6 percent in November with the decline concentrated in single-family. Single-family starts fell 5.4 percent, while multifamily rose 6.7 percent. Permits were also weak on the month.

Surprise Monthly Drop Not Telling the Full Story

Overall housing starts fell 1.6 percent in November with the entire drop in single-family starts. The decline in starts to 1028K in November was from an upwardly-revised 1045K in October. Single-family starts fell on the month. With the level of single-family permits running below starts, we could see further weakness in the coming months. On the other hand, the volatile multifamily component has now been up in two of the past three months. However, the pace is expected to moderate as apartment fundamentals have likely peaked.

Despite the decline, the report is still positive as the overall level of starts has remained above the key one-million mark for the third month in a row. Moreover, we are now in the seasonally slow period of the year and monthly swings are expected. That said, the trend is a bit more instructive. Through the first 11 months of the year, overall starts are up 7.7 percent relative to the same period last year.

Permits Deliver One-Two Punch

Construction activity is expected to pick up in 2015, but permits during the month are not fully reflective of this outlook. Total permits fell 5.2 percent in November with broad-based declines. Single-family permits slipped 1.2 percent in November and multifamily declined 11.0 percent. Builders, however, remain fairly optimistic.

Looking Ahead: Modest Increase in Starts

The NAHB/Wells Fargo Housing Market Index fell one point in December, but remains at an elevated level of 57. Despite the modest decline, builders remain optimistic as the index remained well above the critical level of 50 for the sixth straight month. The level of builder sentiment is consistent with our forecast for modest gains in single-family in the coming year. One sticking point, however, is prospective buyer traffic. This component is still reeling from the crash and has yet to break through 50. The December reading was flat on the month at 45. We suspect that buyer traffic will pick up as lending standards continue to ease, especially for borrowers with lower credit scores, and employment and income growth strengthen.

Total housing starts are expected to increase about 12 percent in the coming year with much of the growth coming from single-family starts. Following a mid-single digit gain this year, single-family starts are projected to rise 13.7 percent in 2015 and 12.8 percent in 2016. Multifamily starts should continue to increase, but the breakneck pace over the past four years will likely not be revisited over our forecast horizon. One indicator to watch closely to give a good clue to the direction of housing starts is household formation. With labor market conditions improving, especially for young adults, we expect a gain in 2015