US: Structural challenges persist for housing sector - Nomura

Analysts at Nomura note that US housing starts rose 13.7% m-o-m in October to an annualized pace of 1290k, well above expectations (Nomura: +1.9% to 1148k, Consensus: +5.6% to 1190k).

Key Quotes

“Starts in September, which were lowered by the recent hurricanes, were revised up to a 1165k pace, down 3.2% m-o-m from August. Strong readings indicate that construction activity is returning to its previous trend after weather-related disruptions. Looking through a transitory boost, we maintain our view that residential construction will expand only at a modest pace, constrained by structural challenges.”

“Single-family housing starts increased 5.3% m-o-m after a 4.4% decline in September. Much of the rebound was driven by a sharp increase in the South, signaling that construction activity is likely back on track. The reconstruction following recent inclement weather may have added to the rebound, but we expect this contribution to be gradually spread over several months as filing for flood insurance claims can take time and construction and specialty trade labor shortages may worsen in a tight labor market.” 

“National multifamily housing starts, which tend to be highly volatile on a m-o-m basis, rose sharply by 36.8% m-o-m. On a 12-month basis, multifamily starts fell, and have trended lower so far this year. The multifamily housing market has been slowing with higher rental unit vacancy rates in large cities. We expect multifamily housing starts to remain subdued considering continued high supply relative to demand. This is consistent with our expectation that multifamily residential construction will remain a drag on GDP growth over the near term.”

“However, despite high vacancy rates, the number of multi-family residential buildings under construction remains elevated and completions of these properties are on the rise, indicating that the supply in the pipeline still remains high. A slow response of apartment building supply to changes in demand could exacerbate imbalances in rental housing markets. Against this backdrop, we remain relatively conservative about rent inflation in the near term.”

“Elsewhere, housing permits, which track pipeline construction projects, rose strongly by 5.9% m-o-m to 1297k, with upward revisions to previous months. Single-family housing permits rose 1.9% following a 2.9% increase in September, suggesting steady momentum ahead.”

“GDP tracking update: Although the stronger-than-expected increase in housing starts was positive to residential construction in Q4, after rounding, our Q4 real GDP tracking estimate remained unchanged at 2.4% q-o-q saar.”