US: Strength in Multifamily Homebuilding Drives Better-than-Expected Results in Q1

US: Strength in Multifamily Homebuilding Drives Better-than-Expected Results in Q1

The rebound in U.S. housing starts beat market expectations, up 1.9% in March to 1.319 million new homes. That came on top of upward revisions to January and February, with the level of starts over the first two months of the year 7% higher than previously reported. Permits also rebounded 2.5% in March, from a 4.1% drop in February.

The details were slightly softer than the headline suggests, with the strength coming entirely from a 14.4% pop in the volatile multifamily segment. Single-family starts were down 3.7% in March, but they are still 5.2% higher than a year ago. Multi-family housing starts have been up strongly over the past two quarters, after a period of weakness earlier in 2017.

Permits for single-family homes also fell 5.5% in March. Multifamily permits were up 19% in March, and are typically quite volatile.

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Results were mixed on a regional basis. Housing starts rose in the Northeast (+0.8%) and Midwest (+22.4%), while declining in the South (-0.6%) and the West (-1.5%). Weaker homebuilding in the South and West comes after period of strength in both regions over the previous six months.

Key Implications

The stronger-than-expected result for housing starts in March was due to the multifamily segment, which has staged something of a comeback in recent months. Strength in multifamily homebuilding has been concentrated in the South and West. The drop in single-family permits is concerning, but it likely represents a bit of a breather after a stronger period in late 2017. Homebuilding outperformed our expectations for the first quarter as a whole, although it is unclear how much of this represented a pulling forward of activity due to warm weather in many parts of the country.

We expect housing starts to continue to gain ground through 2018, supported by positive fundamentals such as low unemployment and healthy wage increases, which are expected to offset higher mortgage rates. At the same time, tight inventories and rising prices will continue to support homebuilding.

But, barriers to homebuilding activity remain. These include a continued labor shortage in the construction industry and a lack of buildable lots. This may be partly behind the decline in homebuilder sentiment we have seen since December. Additionally, tax reforms that cap the state and local tax deduction and lower the mortgage interest deduction will likely shift demand to lower priced segments of the market. That won’t alter the number of housing starts, but will push the market toward smaller, lower-priced options.

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