Housing Starts Plunge due to Horrific Data from the South

US housing starts in June collapsed.  The 9.3% decline contrasts with expectations for a 1.9% increase, according to a Bloomberg survey.  Adding insult to injury the May series was revised down to show a decline of 7.3% rather than 6.5% as initially reported.    And worse, the building permits fell 4.2%.  They were expected to have risen by 3.0%.

Housing starts averaged a monthly decline of 1.6% in Q2 after a average monthly decline of 2.5% in Q1.   Permits fell an average of 1.1% per month in Q2, twice the rate of decline seen in Q1. 

The weakness was led by the South, where housing starts plunged by nearly 30%.  This overwhelmed the increase in starts in the other regions.  Starts jumped 28% in the Midwest, the best performance in seven years.  Starts in the rose 14.1% in the Northeast and 2.6% in the West. 

Weakness in residential investors was part of the story behind the dismal US economic performance in Q1.  It reduced GDP by a little more than 4 percentage points.   Residential investment depressed Q4 13 GDP by nearly 8 percentage points.  It was the first time in 5 years that residential investment saw two consecutive quarterly contractions. (Note that these figures were from Bloomberg and as a client noted these figures do not look right. Residential investment fell to $483.8bn (annualised) in Q1 to $489bn in Q4, a decline of $5.2bn (or 4.2% at annualised rate), which is equal to about 0.03% of GDP (GDP is about $15824bn) or 0.13% annualised - the latter is the amount residential investment subtracted from GDP (as per Table 2 of BEA release)

The Federal Reserve has acknowledged disappointment with the housing market, though recently the data had been looking better.    Today's data may be seen as a sign that the improvement had been generally a recovery from the weather-induced weakness, with the sector still lacking traction.  Yet, it is not consistent with other data, like the improvement in home builder sentiment.  With the weakness concentrated in the South, it might be a problem with the data.

The average interest rate on a 30-year fixed rate mortgage has fallen about 40 bp this year through early July to about 4.15%.   At the same time, prices have also increased.  In May, the median price of a new home sold was $282,000, of almost 7% year-over-year.    Rarely do price increase metrics adjust for the fact that the US houses are getting bigger.  In 2003, the average US house had 2330 square feet.  by 2013, it had risen more than 11% to almost 2600 square feet.