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Housing Starts Rise in July

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As per latest data published by the National Association of Home Builders (NAHB), housing starts across the U.S. rose 5.9% in the month of driven mainly by multi-family construction.

Housing starts for multi-family construction rose 26%, rebounding from a decline in the previous month. On the other hand, single-family construction declined 2.2%, narrowing from the positive growth seen in June.

Though an unusually wet weather in the South and West pulled down the single-family starts, rising interest rates, tight credit availability and a limited supply of land and labor also had a role to play.

With the recent improvement in economic conditions and the housing market in general, mortgage/interest rates are edging upwards to more normalized levels since May 2013. According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate has risen from 3.59% on May 23 to 4.40% as of Aug 15.

This has raised concerns among some analysts. High interest rates dilute the demand for new homes, as mortgage loans become expensive. This lowers a buyer’s purchasing power. However, another group of analysts believe that in spite of the recently rising interest rates they are still below historical levels and housing is still very much affordable.

Rising interest rates notwithstanding, some companies like Lennar Corporation (LEN - Free Report) and KB Home (KBH - Free Report) witnessed increasing demand in all their housing markets in the past quarter and were able to push pricing further. However, others showed some concern. D.R. Horton, Inc. (DHI - Free Report) noted at its fiscal third-quarter conference call that the spike in interest rates slowed orders Meritage Homes Corp. (MTH - Free Report) , at its second-quarter 2013 conference call, admitted to a little bit of cooling in July due to higher rates, but reported that demand remained stronger than the Jul 2012 levels.

Moreover, supply of both new and existing homes remains constrained by low home inventories. A shortage of land and labor is restricting the construction of homes, both single and multi-family. Home prices have thus started to move up with market demand gaining momentum and supply remaining limited. In fact, a group of analysts believe that rising home prices and thinning home inventories have created a sense of urgency among homebuyers who are now more anxious to buy a house before prices shoot up further.

NAHB also reported that both the multi-family and single-family construction sectors are performing better than last year. Housing starts activity grew a solid 40.2% in the Northeast, 25.4% in the Midwest and 7.2% in the West in July, while it declined 7% in the South.

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