U.S. housing starts in May saw the highest increase since 2016, along with an uptick in applications to build, indicating a rejuvenation of residential construction.
What Happened: Data issued by the Federal Reserve of St. Louis showed a 21.7% jump in the initiation of home construction, reaching an annualized rate of 1.63 million.
The spike includes an 18.5% increase in single-family homebuilding, coupled with an upward trend in the commencement of apartment buildings and other multifamily projects.
Correspondingly, applications to build, often considered a harbinger of future construction, rose by 5.2% to an annualized rate of 1.49 million units, reflecting a particular increase in permits for one-family dwellings.
The uptick seen in construction was triggered by several factors including strengthening demand, receding material costs, and easing supply-chain pressures, according to a Bloomberg report.
However, the upward trend in mortgage rates threatens affordability, according to the report, implying that the renewed momentum in housing demand might be limited. Simultaneously, completed homes rose to a 1.52 million annualized rate, while the volume of one-family properties under construction remained fairly stable at 695,000.
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Peter Essele, head of portfolio management for Commonwealth Financial Network, said the substantial upswing in housing starts, particularly in one-unit structures, hints at an acceleration in new home construction, with the change largely attributed to the drop in lumber costs, which, coupled with rising home prices, is motivating builders to ramp up construction.
On a similar note, Jeffrey Roach, chief economist for LPL Financial, said the current focus should be on the levels of housing activity, rather than the rates of change.
Roach said the rising permits for single-family homes may indicate a bottoming-out of the market for new single-family homes, although the market for existing homes might remain high due to the low supply.
Roach also mentioned that the growing demand for condos and apartments among millennials will bolster construction activity in the coming months.
Moving forward, further data on existing-home sales for April will be issued on Thursday, while a report on new-home purchases is due next week.
Homebuilder Stocks Set To Benefit: The optimism in the residential construction market could offer lucrative opportunities for leading homebuilders. D.R. Horton Inc. DHI, a major player in the market, could benefit substantially from the rise in housing starts and building permit applications.
A similar potential is evident for PulteGroup Inc. PHM, another significant homebuilder, particularly if the uptrend in one-family dwelling permits continues.
Lennar Corporation LEN has already been surpassing expectations and could continue to thrive, especially with the anticipated demand for condos and apartments among millennials.
Read next: Despite Housing Market Jitters, Paint Giant Is Set To Deliver: Analyst
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