Is the Decline in Housing Starts & Permits Damaging Enough?

Housing starts and building permits declined 7% and 5.7%, respectively, in February after registering impressive growth in January. Meanwhile, construction costs escalated in the month, driven by price increases of several building materials including steel and aluminum, per the latest report released by the Associated General Contractors of America of Labor Department. But is it really a thing to fret about? Let’s delve deeper into the numbers to get a clearer picture of the current scenario.

Low Multi-Family Units a Dampener

The decline in housing starts was largely propelled by a fall in multi-family starts that decreased 28% from the January figure. The February tally roughly doubles the losses, expected by analysts.

However, single-family starts actually went up 2.9%. Consistent job growth and increased interest from first-time homebuyers are adding to this momentum.

Residential building permits, an indicator of upcoming construction activity, dropped 5.7% in February to an annualized rate of 1.3 million units from January. Single-family home permits dipped 0.6% while the same for construction of multi-family homes declined 14.8%. Clearly, this indicates home builders are more optimistic about Americans opting for single family houses over apartments.

Is the Reduced February Data Really a Concern?

The latest disruption is not really a concern as single family units, which are generally of higher importance and are indicative of the economy strengthening further, have improved. Though building permits declined on a month-over-month basis, the figure rose 6.5% year over year.

Solid economic growth and job market make us reasonably confident about the industry’s performance. The unemployment rate remained unchanged at 4.1% in February, marking a 17-year low. Moreover, a healthy builder’s confidence reading in March is encouraging, too. Per the latest report of the National Association of Home Builders and Wells Fargo, the Housing Market Index reading in the current month is still very strong at 70.

Yet, builders are concerned about growing labor shortage and limited land availability that are shrinking margins. Apart from concerns  related to a series of interest rate hikes by the Federal Reserve, homebuilders are now worried about higher material costs due to the newly imposed tariffs on aluminum and steel. These are restricting homebuilders from responding to rising demand. However, these factors have failed to mar the industry’s performance to a great extent, which has been top notch for quite some time.

The Zacks Homebuilding Industry has rallied 21.1% in the past year, comparing favorably with 16.3% growth of the broader market (S&P 500). Moreover, a good industry rank (top 33% of more than 250 industries) supports the growth potential of the stocks in this industry.

Again, this industry’s expected earnings per share (EPS) growth rate of 17.9% for three-five years is better than the broader market’s 9.7%.

A few major homebuilders like KB Home KBH, Lennar Corp. LEN, D.R. Horton, Inc. DHI and NVR, Inc. NVR are well poised on bullish fundamentals of the housing market.
All four stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank(Strong Buy) stocks here.

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