Homebuilders Capitulate to Inflation, Ramp Up Construction Despite High Costs

U.S. homebuilders ramped up construction at a much faster pace than expected in November, bringing to an end two months of contraction and four months of lower than expected growth.

Construction started on new homes at a seasonally adjusted annualized rate of 1.679 million in November, a nearly 12 percent gain from October, data from the Commerce Department showed Thursday.

That was a far biggest acceleration of home building than economists had expected. The consensus was for housing starts to come in at 1.563, which would have been a 2.8 percent gain. The previous month was revised up to 1.563 million.

Builders broke ground on single-family houses at a rate of 1,173,000, 11.3 percent above the revised October figure of 1,054,000. Compared with a year ago, starts are down 0.8 percent.

Housing starts have been sluggish, surprising economists to the downside since August. Housing starts actually fell on a month-to-month basis in August and September, defying predictions that a shortage of homes for sale and skyrocketing prices would drive construction up.

The sluggishness was largely blamed on the scarcity of labor and the high costs of building materials. Lumber costs have been volatile this year, spiking this spring, crashing this summer, and rising again in recent months.  Builders appeared to be holding back on projects hoping price levels would come down.

November may have been a tipping point when builders realized that prices would continue to rise and waiting would only make construction more costly. Materials and components for construction rose 1.6 percent compared with October, data from the Labor Department’s Producer Price Index showed this week. Compared with a year ago, prices are up 21 percent. Services costs for construction were up 14 percent.

Last month, the pace of permitting for new housing units began to pick up and it increased again in November. Permitting for new homes occurred at a seasonally-adjusted annual rate of 1.71 million, up by around four percent from October and one percent from a year ago.

Compared with last year, housing starts were up in the Midwest and South,  the largest market for new houses, and down in the West and the Northeast, the smallest market. On a monthly basis, starts exploded higher in the small Northeast market, rose in the South and West, and declined in the Midwest.

The total number of housing units under construction but not completed now stands at 1.486 million, the highest level since December 1973. The number of single-family units under construction is 752,000, which is the highest since May 2007.  The number of units authorized but not started is 258,1000, the highest since September 1974, more evidence that inflation had been holding back builders in recent months.

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