Sharp drop in starts is not a cause for concern, but starts are still lagging demand
Housing starts came in below expectations falling 8.2% M/M to 1.192 million on an annualized basis.
- Smoothing the data shows that building activity is still robust. The data is quite choppy and best viewed as a moving average to smooth out volatility. LendingTree prefers the 3-month average to balance timeliness with information value. The 3-month average of single-family starts of 890,000 is at its highest level since the financial crisis. The multi-family 3-month average is recovering having sunk to a 4-year low in September.
- Growth is being driven by tight single family inventory. The construction market is rotating into single-family as tight inventory boosts the segment while rising rental vacancies and slowing rental inflation reduce the incentives for multi-family developers.
- 2018 should see further improvement. 2017 was the strongest year for homebuilding since 2007 and elevated homebuilders confidence suggests starts will continue to advance in 2018. The tax plan will also increase builder margins by 10-15%, encouraging more activity including at the lower end which has been underserved in the recovery. While the strengthening of single-family starts is encouraging, new construction remains subdued relative to the size of the population indicating room for further gains.