November Housing Starts: Canary in the Coal Mine?

• November housing starts rose 3.2 percent from October but were down 3.6 percent from a year ago, according to the Census Bureau.
• Housing permits rose 5 percent from October and 0.4 percent from November 2017.
• National housing completions rose 0.4 percent from October, but fell 3.9 percent from November.

The relative strength in building activity in November is welcome news after months of lackluster reports. But the topline numbers obscure some persistent weakness in the sector; much of last month's growth was driven by the volatile multifamily segment, with single-family home building activity falling.

While several economic indicators – notably the historically low national unemployment rate – paint a picture of a booming American economy, the residential construction market hit the pause button in 2018. And as it becomes more clear that the three headline construction indices – permits, starts and completions – all look to end 2018 on a sour note, speculation has already begun as to whether the construction industry is a macroeconomic canary in the coalmine signaling a larger shift to come. Permits and starts are down from a year ago, and completions are just barely higher – the end-game of projects begun months or years ago when the outlook was a bit rosier.

This construction pullback is not due to lack of demand, and instead seems born out of builders’ fears that it’s almost impossible for them to profitably deliver new homes at the lower price points where that demand is strongest. Builders have struggled with rising labor, materials and land costs for years, and while materials costs have eased somewhat lately, labor costs have only surged higher. Rising mortgage interest rates, tax changes and an aging recovery have also snowballed, putting a meaningful dent in what buyers can afford to pay. Having turned a corner in 2018, the critical unknown for 2019 will be whether this builders’ retreat will prove to be prescient or premature.