US Weekly Economic Commentary: Single-family housing activity forms a bottom

Reports last week reinforced the view that single-family housing activity has formed a bottom. The National Association of Homebuilders Housing Market Index rose in June for the sixth consecutive month to the highest level since last July. Housing starts surged in May by nearly 300,000 units, to 1.63 million, the highest since last May, with starts of both single-family and multi-family units rising sharply.

Volatile starts were strong relative to permits, so we do expect some retrenchment in starts over the next few months. However, permits for single family units, a better measure than starts of underlying demand, rose for the fourth consecutive month and are up nearly 20% from a trough in January. Existing home sales rose only slightly in May, still constrained by lack of inventory. After seasonal adjustment, the median sales price of existing homes edged up in May to the highest level since last October.

Housing activity has been supported by ongoing gains in employment, an easing of mortgage rates from the peak reached last October, lengthy backlogs that accumulated during the pandemic but that can now be worked off as supply constraints ease, and a shortage of affordable new units. In addition, declines in materials prices alongside the renewed upturn in house prices has tended to widen builder margins.

The vulnerability of residential construction is in multifamily units, for which permits and starts both exceed what we consider to be a sustainable pace even as the number of units under construction—nearly one million—is the highest ever recorded. So, while we project residential construction to continue recovering, we expect gains in single-family activity to be partially offset by weakness in multi-family starts.

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The "flash" estimate of our own Purchasing Managers' Index suggested that the economy continued to expand in June, with gains in the service economy partially offset by weakness in the industrial sector. Initial claims for unemployment insurance during the week ending June 17 remained at 264,000, up from 194,000 in mid-January and the highest level since October of 2021. Claims have been drifting up unevenly since last October, and a sharp jump in May — accentuated after correcting the national numbers for fraudulent claims in Massachusetts — can no longer be attributed to the possibility of faulty seasonal adjustment around the Memorial Day weekend. We're inclined to view the updrift in claims as an indication of some loosening in labor market conditions.

This week's economic releases:

• Durable goods orders (June 27): We look for a 0.9% decline in orders for nondefense capital goods excluding aircraft.
• New home sales (June 27): We estimate that the annualized pace of new home sales declined in May to 683 thousand. Lean inventories of existing homes for sale and elevated home prices have provided a recent boost to new home construction and sales.
• Nominal goods deficit (June 28): We estimate that the nominal goods deficit narrowed in May to $92.7 billion. This would reverse about one-third of a $14.6 billion widening in April.
• Nominal personal income (June 30): We estimate that nominal personal income rose 0.3% in May, while nominal personal consumption expenditures (PCE) was unchanged and real PCE fell 0.1%. The latter would follow a 0.5% increase in April.
• Consumer confidence (June 27): We look for the consumer confidence level to rise to 104.0 in June from 102.3 in May.
• First-quarter GDP (June 29): We expect that the Commerce Department's third estimate of first-quarter GDP growth will come in at 2.3%, based on our processing of the GDP source data that have been reported over the last month.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.