June U.S. home construction slowed down, but don’t freak out

July 17, 2014, 1:20 PM UTC

U.S. home construction may have fallen lower than expected, but Thursday’s report from the Commerce Department shouldn’t get anyone interested in the housing market’s recovery too down.

Home construction fell to a nine-month low in June, declining 9.3% from the prior month while building permits slid 4.2%. Housing starts decreased to a seasonally adjusted annual rate of 893,000, the department reported, below the downwardly revised May estimate of 985,000. Newly authorized building permits totaled 963,000 on a seasonally adjusted annual rate in June.

Observers had expected housing starts to total 1.03 million in the latest month, with permits projected at 1.04 million, according to a poll conducted by Bloomberg News. The weak results comes after a disappointing report in May, and the decline in housing starts for June was even worse than the most bearish of estimates.

Housing starts were at their lowest level since September 2013, and the sharp decline is a bit of a surprise as confidence from builders that focus on newly-built single-family homes reached a six-month high in July, according to the National Association of Home Builders/Wells Fargo Housing Market Index this week. Still, home construction rose 7.5% from a year ago.

The housing market suffered a mixed performance earlier this year but data in May signaled an upswing in demand, important for the sector as it progressed into the key spring and summer home-buying season. An improving jobs climate and some pent-up demand among potential home buyers has boosted optimism among U.S. homebuilders.

“I think right now we are at a midpoint in the housing market cycle,” said John Lloyd, global head of credit research at investment firm Janus Capital Group.

Lloyd expects new housing starts will increase to a roughly 1.4 million pace in a few years, bolstered by better employment trends, immigration growth and rising interest from the Millennial generation to purchase a home.

And while the latest housing construction data is likely to disappoint investors, many of the nation’s top homebuilders have reported higher sales and profit growth in recent quarters, benefiting from the sector’s recovery. Lennar (LEN) and KB Home (KBH) late last month each reported an increase in net home orders for the quarter ended May 31. Both benefited from higher average selling prices and that trend seems poised to continue, as Lennar said the average sales price for new orders totaled $327,000 in the latest period, up from $293,000 a year ago.