Single-family housing starts dropped 6.2% in March, with the February level largely unrevised. Single-family permits dropped a more modest 1.1% in March.
Even with these declines, single-family starts remain elevated relative to the levels of mid-2016 and also relative to the recent levels of new-home sales. Our take has been that builders got ahead of demand in the last few months, and that starts had risen much more than sales levels, leading to an accumulation of inventories of unsold new homes. We thought that either new-home sales would have to rise sharply or starts would have to pull back to levels more commensurate with housing demand.
It is hard to tell for sure whether the declines seen in starts in March are the beginning of such a pullback process or merely a one-month blip. As seen in the chart, for now, starts are still well above levels consistent with recent sales volume.
Housing starts have been a bright spot for the economy so far in 2017. While consumer spending and job growth have been relatively sluggish and while 1Q17 GDP growth is expected to come in very weak, residential construction spending has risen nicely so far this year and will actually contribute a good boost to 1Q17 growth. (It is the other sectors of domestic demand that have been flagging in recent months.)
We are skeptical that the strength seen in residential construction so far this year will continue. Again, it will take a surge in new-home sales in coming months for this to happen. We’ll get some indication next week—when March new-home sales are announced—as to whether today’s decline in starts is just a blip or a harbinger of things to come.