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Housing Losing Ground: Will it Hit Q3 Economic Growth?

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U.S. housing data continued to tumble in August. Two devastating hurricanes, Harvey and Irma, along with ongoing higher labor and material costs have been hitting the industry hard. Also, inventory shortage has started taking its toll on sales’ pace.

August Housing Data

Existing home sales declined to a one-year low in August, per the latest report from National Association of Realtors or NAHB. Existing-home sales slipped 1.7% last month to a seasonally adjusted annual rate of 5.35 million. This marks the fourth decline in five months, bringing the annual rate to the lowest level in 12 months. Purchases in Houston dropped 25% year over year and sales would have been flat excluding Harvey effect.

Economists are of the opinion that the diminishing data reflects the inventory shortage prevailing in the U.S. real estate market. This has shot up average home prices nationwide. In fact, median sales price of existing homes rose 5.6% last month from a year earlier. Moreover, total housing inventory declined 6.5% year over year to 1.88 million, marking the 27th consecutive year-over-year decline. That’s just 4.5-month supply. Investors should note that it is more preferable to have about six months of supply for a healthy market.

Further adding to the woes, housing starts came in at a seasonally adjusted annual rate of 1.18 million last month. This is 0.8% down from a revised July estimate of 1.19 million. Nevertheless, August construction starts were 1.4% higher year over year. Single-family starts were even stronger, growing 17.1% from a year earlier.

Meanwhile, building permit, another economic indicator used to determine the health of the housing sector, increased sharply by 5.7% from the previous month with 1.3 million authorizations. Last month’s permit was also 8.3% above the August 2016 level of 1.2 million. According to Census Bureau data, the areas in Texas and Florida that were devastated by the storms accounted for about 13% of permits issued in the country last year.

Investors should note that housing starts, permits and completions dropped 4.8%, 4.1% and 6.2%, respectively, in July. New U.S. single-family home sales also unexpectedly fell 9.4% in July, the lowest level since December 2016.

Dipping Housing Data a Drag on Economic Growth in Q3?

Earlier this month, September readings gauging builders' view on sales over the next six months slipped from August. Economists are of the opinion that shortage of skilled construction labor is expected to worsen following the two devastating storms and rebuilding operations are likely to drive construction costs higher causing delays. The construction sector was already witnessing labor shortage, only to worsen post the hurricanes. Rising labor costs are threatening margins of noted homebuilders like KB Home (KBH - Free Report) , D.R. Horton, Inc. (DHI - Free Report) , PulteGroup Inc. (PHM - Free Report) , Toll Brothers, Inc. (TOL - Free Report) , Lennar Corporation (LEN - Free Report) and others.

That said, homebuilders' overall vision of the housing market remains positive. Strong job market, favorable demographics and low mortgage rates that make buying a home very affordable, should act as tailwinds. These positive factors are weighed down by the simple fact that there are just a few homes actually available to buy.

The August housing data may have been weak due to Hurricane Harvey or Irma and the sales pace is expected to remain subdued through 2017 in the Houston area as well as in parts of Florida.

Nonetheless, re-building efforts and the lost activity are expected to show up in 2018. As the hurricane-ravaged communities rebuild, activity could pick up, giving way to improving demand later this year and into next.

Hence, this mixed report suggests that housing could remain a drag on economic growth in the third quarter.

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