US housing starts tick higher in July, led by apartment construction

U.S. housing starts unexpectedly rose 5.2% in July to an annual rate of 1.428 million units, primarily buoyed by an 11.6% surge in multi-family projects, while single-family starts also ticked up 2.8%. This increase occurred despite elevated mortgage rates, which recently fell to 6.58%, the lowest since October. However, the sustainability of this rebound is questionable as total permits for future construction declined 2.8% to a five-year low, driven by a nearly 10% drop in multi-family permits, suggesting residential investment will likely continue to weigh on GDP.

Analysis

U.S. housing starts unexpectedly rose 5.2% in July to a seasonally adjusted annual rate of 1.428 million units, significantly beating economists' forecasts of 1.290 million. This increase was primarily driven by a pronounced 11.6% surge in the volatile multi-family segment, which has now jumped over 50% in the last two months. Single-family starts, which represent the largest portion of homebuilding, also posted a modest 2.8% gain. However, the sustainability of this rebound is highly questionable, as the critical forward-looking indicator of total building permits fell 2.8% to a five-year low. This decline in permits was led by a nearly 10% drop in the multi-family category, directly contradicting the current construction surge and signaling a potential future downturn. The market remains constrained by high mortgage rates, which, despite recently easing to 6.58%, continue to suppress demand and have led to housing inventory levels approaching those of late 2007. Consequently, more than a third of builders are cutting prices, and residential investment is expected to remain a drag on U.S. GDP through the third quarter.

Key Decisions for Investors

• Investors should view the headline jump in July housing starts with considerable caution, as the simultaneous fall in building permits to a five-year low indicates a likely weakening of future construction activity.
• The divergence between soaring multi-family starts and plummeting multi-family permits suggests the current strength in apartment construction is temporary, warranting a skeptical stance on companies with heavy exposure to this segment.
• Given that over a third of builders are cutting prices amid high inventory, it is critical to scrutinize the margin resilience and inventory management of individual homebuilder stocks.
• A meaningful recovery in the housing sector remains contingent on improved affordability, making upcoming Federal Reserve interest rate decisions and their impact on mortgage rates the key catalyst to monitor.