Housing Construction Dips in May - Analyst Blog

Shortage of lots and skilled labor and rising cost of materials have been making things difficult for builders for quite some time now. Additionally, the spike in mortgage rates and rising home prices are also hurting demand. As per data provided by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, nationwide housing construction decreased 6.5% in May to a seasonally adjusted annual rate of 1.0 million units.

Released in Jun 2014, the data also showed that the decrease in total housing construction in May was primarily due to a dip in multifamily starts and single family starts. Housing start refers to the number of privately-owned housing units on which construction work has been started in a given time frame. Single family starts dipped 5.9% to 625,000 units. Multifamily starts dipped 7.6% to 376,000 units.

The overall decline in housing starts may be due to builders exercising caution in terms of adding to the inventory. The housing slowdown that began in the second half of 2013 was aggravated by a harsh winter in the December quarter, which delayed construction and raised serious doubts about the strength of the housing market. As a result, many companies witnessed declining order trends in the subsequent quarters. In fact, homebuilding companies like Toll Brothers, Inc. TOL and NVR, Inc. NVR witnessed soft order growth in the last reported quarter. In addition, builders are also facing issues concerning access to lots and labor.

As a result, housing production declined in most of the regions. Housing production decreased 16.5% in the Midwest, 16.3% in the West and 25.2% in the Northeast.  However, housing production rose 7.3% in the South.

Moreover, new building permits, which are an indicator of future home building activity, decreased 6.4% in May. The decrease in building permits was due to a 19.5% decrease in multifamily permits, offset by 4.0% increase in single family permits. Regionally, housing permits increased in the Northeast and Midwest and declined in the South and West. The increase in single family housing permits data indicates that builders are hopeful that there could be pent up demand for homes in the upcoming quarters in 2014.   

Investors interested in the homebuilding sector can consider stocks like Gafisa S.A. GFA and TRI Pointe Homes, Inc. TPH. Both Gafisa and TRI Pointe Homes hold a Zacks Rank #2 (Buy).