Construction of New Homes Improves, but Home Builders Still Struggle With Lack of Labor and Materials

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The numbers: Home-construction activity continued to improve in June, but home builders are facing tough choices in a challenging market.

U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.64 million in June, representing a 6.3% increase from the previous month’s downwardly-revised figure, the U.S. Census Bureau reported Tuesday. Compared with June 2020, housing starts were up 29%, though the year-over-year comparison is skewed somewhat by the effects of the COVID-19.

The pace of permitting for new housing units dipped again in June, however. Permitting for new homes occurred at a seasonally-adjusted annual rate of nearly 1.6 million, down 5% from May but 23% up from a year ago.

The figures for housing starts and permits are expressed as annual rates, meaning that’s the full amount of homes that would be built or permitted if builders maintained this pace for a full year. Economists polled by MarketWatch had expected housing starts to occur at a pace of 1.68 million and building permits to come in at a pace of 1.59 million.

What happened: Construction companies broke ground on a higher number of both single-family homes and multifamily buildings in June when compared with the previous month. Regionally, though, housing starts varied significantly.

The Northeast and Midwest both saw declines in housing starts, while the West and South saw gains. The West in particular saw housing starts surge to the highest level since February, with a 13% monthly increase.

The big picture: The most recent sentiment data from home builders signaled growing uncertainty regarding the strength of the market for new homes. The construction industry continues to face serious shortages of labor and materials, driving the costs of building higher — though the cost of lumber has stabilized after months of resting at or near record highs.

The factors that have propelled home construction haven’t vanished. The nation still lacks an adequate supply of housing to meet demand, pushing people into the market for new homes. However, rising prices and the general stress caused by home-shopping right now could be weighing on some buyers, who may ultimately decide to forgo their plans to purchase a home for the time being. That growing lack of interest on the part of buyers has been reflected in mortgage applications data in recent weeks.

What happens next in the market for new homes will depend on what path builders take. “Builders are grappling with whether to ramp up inventory and pass lower prices to consumers, or take advantage of the current opportunity to offset last year’s setbacks by boosting profit margins,” George Ratiu, senior economist at Realtor.com, said. If material costs stabilize further, Ratiu argued, then builders may be encouraged to pass those savings onto buyers and ramp up operations.

What they’re saying: “Activity is well-supported by strong demand and very tight resale supply in many markets. Rising input costs and availability of materials remains an issue, but lumber prices have finally cracked,” Robert Kavcic, senior economist at BMO Capital Markets, wrote in a research note.

“Housing rebounded strongly during the pandemic, lifted by shifting consumer demand, especially for single-family homes. But an inventory shortage and high input costs are boosting prices, a constraint for both builders and buyers,” wrote Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a research note.

“Homebuilders initially appear to have been reluctant to cut production when demand began to falter, likely because inventory was very low at that point and they were afraid of losing market share. Now, though, no one will want to be left holding excess inventory at the end of the summer,” Ian Shepherson, chief economist at Pantheon Macroeconomics, wrote in a research note.

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