Housing Starts Hit 7-Month Low; Setback Seen as Temporary

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FILE - In this Wednesday, March 25, 2015, file photo, apartment buildings under construction are seen, in Maitland, Fla., a suburb of Orlando. The Commerce Department reports on October U.S. home construction Wednesday, Nov. 18, 2015. (AP Photo/John Raoux, File)
John Raoux/APApartment buildings under construction in Maitland, Fla.
By Lucia Mutikani

WASHINGTON -- U.S. housing starts in October fell to a seven-month low, weighed down by a steep decline in the construction of multifamily homes, but a surge in building permits suggested the housing market remained on solid ground.

While the drop in groundbreaking activity reported Wednesday by the Commerce Department implied a moderation in residential investment early in the fourth quarter, it did little to change the view that the Federal Reserve would hike interest rates next month.

"Overall, fundamentals for the sector remain solid. Household formation is rising, demand for new homes is outstripping supply, and homebuilder confidence remains near its highest level in a decade," said Michelle Girard, chief economist at RBS in Stamford, Connecticut.

Groundbreaking dropped 11 percent to a seasonally adjusted annual pace of 1.06 million units last month, the lowest level since March, the Commerce Department said. October marked the seventh straight month that starts remained above 1 million units, the longest stretch since 2007. Building permits increased 4.1 percent to a 1.15 million-unit rate.

Rapidly rising household formation, mostly driven by young adults leaving their parental homes and a strengthening labor market, is supporting the housing sector.

Highlighting the housing market's underlying strength, a second report from the Mortgage Bankers Association showed applications for loans to purchase homes jumped 6.2 percent during the week ended Nov. 13 from a week earlier.

In the wake of the soft October housing numbers, Barclays trimmed its fourth-quarter gross domestic product estimate by one-tenth of a percentage point to a 2.2 percent annual rate.

Housing has contributed to GDP growth in each of the last six quarters, adding 0.2 percentage point to the third-quarter's 1.5 percent growth pace.

"Homebuilding may not keep the Fed from 'liftoff' but it will be their biggest concern. When Fed officials say they want to see more investment spending this recovery, they really mean residential housing construction," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

Minutes of the Fed policy-setting committee's Oct. 27-28 meeting showed officials rallied behind a possible December increase in the U.S. central bank's benchmark overnight interest rate.

U.S. stock markets were trading higher, with the S&P homebuilding index rising 2.15 percent. D.R. Horton (DRI), the largest U.S. homebuilder, gained 1.69 percent. Lennar (LEN), the nation's second-largest homebuilder, advanced 2.22 percent.

The dollar was flat against a basket of currencies. Prices for longer-dated U.S. government debt pared their losses.

Land Labor, Shortages

Economists had forecast housing starts dropping to only a 1.16 million-unit pace last month. Many viewed the weakness in October as being related to land and labor shortages, constraints that have been flagged by homebuilders.

"Structural issues including a shortfall in immigrant labor are inhibiting construction. The supply shortage in the single-family market is not likely to be alleviated any time soon," said David Nice, an economist at Mesirow Financial in Chicago.

Groundbreaking on single-family home projects, the largest segment of the housing market, fell 2.4 percent to a 722,000-unit pace in October. Single-family starts were pulled down by a 6.9 percent plunge in groundbreaking activity in the South, where most homebuilding takes place. Single-family starts rose in the Northeast, the Midwest and the West.

Starts for the volatile multifamily segment plunged 25.1 percent to a 338,000-unit pace.

Single-family building permits rose 2.4 percent last month to their highest level since December 2007. Single-family permits in the South also hit their highest level since December 2007. Multifamily building permits increased 6.8 percent.

"The October permit requests were above the starts number, and for the past three months permits have been running a little ahead of the building pace, so don't be surprised if housing activity rebounds solidly in November," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

9 Numbers That'll Tell You How the Economy's Really Doing
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Housing Starts Hit 7-Month Low; Setback Seen as Temporary
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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