In June, the residential construction sector saw a boost as builders shifted their focus to expanding multifamily projects. According to data released by the Census Bureau on Wednesday, housing starts increased by 3% to a seasonally adjusted annual rate of 1.35 million units. The rise in construction was largely driven by the multifamily sector, with new construction of five or more units reaching a seasonally adjusted annual pace of 360,000, up from 295,000 the previous month.
However, while this increase may appear positive at first glance, some economists are cautioning that it may not be sustainable. Thomas Ryan, an economist at Capital Economics, noted that the gains in housing starts and building permits were primarily due to the volatile multi-family sector. He believes that this surge may be temporary and could potentially lead to further weakness in the housing market.
One concerning trend highlighted in the data is the decline in single-family starts and permits. Both metrics fell by 2.2% and 2.3% month over month, respectively. This marks the fifth consecutive monthly drop in single-family permits, indicating a potential slowdown in new home construction. Ryan pointed out that homebuilders may be hesitant to initiate new projects due to an oversupply of homes on the market, representing 9.3 months of supply at the current sales rate – the highest level since November 2022.
Following the release of the government data, homebuilder stocks experienced a slight decline. The SPDR S&P Homebuilders ETF (XHB) dropped by 0.66%, with major homebuilders like D.R. Horton, Inc. (DHI), Lennar (LEN), and Toll Brothers (TOL) also seeing decreases in their stock prices during morning trading.
Overall, while the increase in residential construction activity in June may initially seem positive, there are underlying concerns about the sustainability of this growth. The continued weakness in single-family construction and the oversupply of homes on the market suggest that the housing market may face challenges in the coming months. Investors and industry experts will be closely monitoring these trends to assess the future outlook for the residential construction sector.