Drop in U.S. Housing Starts Due to Inflated June Figure, but Trend Still Downward

Despite coming in slightly higher than was expected, housing starts still slid 11% to 965k in July, though economists say the drop is misleading given the artificially high reading in June.

Last month, economists unanimously agreed that the headline index was misleading due to a change in the housing code of New York City which propelled the jump.

The U.S. Department of Commerce also reported Tuesday that June's figure of 1.066 million starts was revised up to 1.084 million.

Meanwhile, building permits totalled 937k in July, a decline of 17.7% month-over-month from an upwardly revised reading of 1.138 million last month and above the consensus call for 970k.

"Aside from retrenching from the one month blip in the permits data, the much slower pace of building permits also reflects the contraction in lending," said Charmaine Buskas, senior economic strategist at TD Economics. "Credit conditions have tightened sharply and that is affecting appetite for housing.

In addition, the confluence of other macroeconomic headwinds such as falling house prices and elevated foreclosures has also limited demand for housing. Buskas noted that, on a year ago basis, housing starts are now down 29.6%, while building permits are down 32.4%."

Single-family homes - the most important component in the report, accounting for four-fifths of housing starts - fell 2.9% to a 17-year low of 641k. Multiple-family homes contributed 324k, far lower than the previous month's 424k level.

"There are still few signs that activity in the housing market has reached a nadir," she added. "But, at least in the case of housing starts, it seems that the pace of decline has slowed when compared to last year."

Guy Lebas from Janney Montgomery noted that starts varied sharply by region, with the Northeast posting the weakest performance. "Interestingly, single-family starts in the Northeast, a region which has seen relatively stable prices though falling sales, were higher by 11.3%," he said.

While the rate of monthly declines has slowed, Paul Ashworth of Capital Economics noted the trend is still downward.

Housing starts refer to the number of homes being built and provide a sense of how the housing sector has performed in the previous month. Housing permits represent plans to construct new homes, an indicator of housing performance in upcoming months.

By Stephen Huebl and edited by Nancy Girgis