 | Housing starts declined 10.0% in May to 593,000 units at an annual rate |
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Implications: Home building dropped sharply in May, coming in well below where most economists, including us, thought it would. However, we can't help but notice that the drop in the South – to a 288,000 annual rate from a 366,000 rate in April – was larger than the overall national decline. In other words, outside the South, housing starts increased in May. We don't think it's a coincidence that the South is the region most influenced by the BP oil disaster. In addition, the South was hit by major flooding in May. Single-family housing starts in the South dropped 27% in May, a record decline for that region (dating back to 1984). Completions in the South of all kinds of housing units, both single-family and multiple-units structures fell 28%, a record decline (dating back to 1979). We can't help but think that, besides the flooding, the disaster has hit the Gulf region with a sudden bout of risk aversion, similar to a financial panic. If so, we expect a recovery in the months ahead as repair work and clean up shifts resources to new economic "winners," renewing the process of economic growth and a return to the recovery trend in housing starts. More troubling in today's data was the decline in building permits, which occurred whether or not we include the South. We anticipate that this will reverse next month. If not, it could be a sign of credit constraints limiting building. In that situation, home prices would recover more quickly than we anticipate while home building recovers more slowly.
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