September Housing Starts: Still Seeking Top Gear

• September housing starts rose 1.9% in September from August and 11.1% year-over-year, to 1.415 million, according to the Census Bureau.
• Building permits were up 5.2% from August to September, to 1.553 million, and up 8.1% from a year ago.
• September housing completions rose 15.3% from August and 25.8% from a year ago, to 1.413 million.

After a slight retreat in August, the modest improvement in construction activity in September is welcome news, a good but not great report that reflects both soaring builder confidence and also likely some stubborn obstacles preventing the industry from truly finding its top gear.

Permits were up strongly, the best indicator we have of more homes to come in medium-term. But growth in starts has been more fitful, up only slightly from August, perhaps reflecting some combination of hurricane and/or wildfire-related disruptions in activity, ongoing volatility in lumber prices, regulatory hurdles or -- most likely -- some combination of all of the above. Single-family construction continues to lead the way, with permits for freestanding, detached homes rising steadily since spring, at the expense of larger multifamily projects that have been more inconsistent. A historic shortage of for-sale homes on the market and mortgage rates that remain near all-time lows, combined with demographic tailwinds as millennials age into their prime home buying years and a likely pandemic-driven shift in preference toward homes better suited to work, school and play are all keeping demand at a boil.

This persistent demand should be and largely is music to builders' ears – a measure of homebuilder confidence hit a record high in September, and has since risen further -- but instead of a consistent and strong acceleration in building activity, construction levels have settled into a pattern of more-modest growth. The longstanding regulatory and supply-side constraints faced by builders are forcing them to be more selective in the projects they take on.

Today’s release was another win for the housing market, but it feels like builders might have more in them given their current optimism and favorable market conditions -- and it will be critical that they find ways to unlock that potential in order to meet the ongoing housing shortage.