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Why the home-construction report is better than you think

June 17, 2014, 10:31 AM ET

Here’s why Tuesday’s data on home construction is better than you think: A key reading on builders’ plans to build single-family homes rose last month, signaling that the market may soon resume a rebound that stalled over the winter.

The headline number from the housing report showed that the construction pace on new U.S. homes fell 6.5% in May, missing Wall Street’s estimates. However, a crucial data nugget in the report, the series on permits, showed that the pace of builders’ plans to build single-family homes — a leading indicator for construction — rose 3.7% last month, according to the U.S. Commerce Department.

“We think starts will rebound in June. One decent month for [single-family] permits is not a trend, but we think that the downward trend of the fall and winter is over, for now,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note.

Such a take on the housing data dovetails well with a recent home-builder survey showing that they perked up quite a bit recently, though there’s still some pessimism. It remains tough for borrowers to get a mortgage, and home prices and interest rates have said goodbye to 2013’s ultra-low levels. Still, trends in job growth signal that the labor market is healing, a top factor in many families’ decisions over whether to buy a home.

And here’s an important reason to pay particular attention to the data on permits rather than construction starts. Statistically, the government is much more confident in the data on permits than the data on housing starts. For May, the government estimated that the 3.7% rise in the pace of single-family-home permits had a confidence interval of plus or minus 1.2%, meaning that the government is pretty sure that permits rose last month. But the confidence interval for the 6.5% drop in housing starts was plus or minus 10.2%, indicating that the government isn’t sure whether the pace of home construction actually fell last month.

It’s worth noting that despite May’s rise in building permits for one-family homes, plans to build are far below historical levels. Over the decade leading up to a 2005 peak for single-family-home permits, the average pace was almost 1.3 million, 52% higher than from May’s rate.

The pace of permits for apartments did fall last month. However, economists prefer to see more construction made up by single-family homes because building one single-family home costs more and creates more jobs than constructing a single apartment.

–Ruth Mantell
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http://blogs.marketwatch.com/capitolreport/2014/06/17/why-the-home-construction-report-is-better-than-you-think/

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