Housing Sends Mixed Signals As Starts Fall, Home Depot Holds Up

In news that should surprise exactly no one, US housing starts fell sharply in July, even as an upward revision to June’s print saved the series from a third consecutive monthly decline.

Starts dropped 9.6% last month, data out Tuesday showed (figure below). The 1.446 million annual pace was well below consensus and nearly matched the lowest estimate from five-dozen economists.

June’s rate was revised higher, to 1.599 million, representing a 2.4% gain and reversing an initially reported 2% decline. May’s outsized drop was revised even lower.

Last month’s annual pace was the slowest since February of 2021.

I’ll employ my customary reminder and recycle some familiar talking points. Housing starts aren’t supposed to be falling yet. Theoretically, higher rates should only impact starts on a (considerable) lag in a market where the vacancy rate is low.

Every recession going back six decades was accompanied by sharp annual declines in housing starts. The only exception was the dot-com bust. Maybe this time is different. But I doubt it.

Perhaps more notable than the headline miss was another drop in single-family starts, which fell a fifth month. June’s figures were revised to show the pace of single-family starts was 1.019 million that month, up from an originally reported 982,000. July’s 916,000 annual rate thus marks the first time in two years that the pace of single-family starts fell below one million (figure below).

The annual rate was the slowest since June of 2020, and represented an 18.5% YoY decline. Multifamily starts fell as well.

Permits dropped, but at a 1.674 million annual pace, managed to beat estimates.

The data came a day after a key gauge of homebuilder sentiment registered an eighth consecutive monthly decline, prompting the NAHB to declare a US “housing recession.”

As the figure (above) shows, sentiment has now caught down to the ongoing drop in activity.

Backlogs remain robust. The number of homes authorized but not started continued to loiter at elevated levels last month, Tuesday’s government data showed.

I’m a broken record on this: Set against new home sales, the juxtaposition is stark (figure below).

That may suggest America is sitting atop an inventory overhang without realizing it. I say that every month. And headlines are beginning to reflect it.

I’ve refined this message and refined it again. It’s repetitive, but I don’t see much utility in attempting to paraphrase myself, so I’ll repeat it verbatim. Builders spent the better part of two years frantically trying to backfill supply to meet voracious demand, and it’s my contention that by the time some new construction is finished, demand will be impaired by higher rates, inflation and a less favorable economic backdrop in the US. Not all of that new construction is under contract. At the very least, buyers will need concessions to absorb it. Investors may be even more demanding when it comes to concessions — after all, they’ve got cash.

If you think any of that sounds far-fetched considering favorable demographics for the housing market and the notion that supply has fallen woefully short of demand in the post-pandemic era, I’d implore you to consider that market participants said the same thing when a few lonely analysts began to warn about excess inventory at America’s largest retailers earlier this year.

On Tuesday, Walmart outlined additional steps aimed at whittling down superfluous stocks of home goods and electronics, where “steps” means price cuts. I’d expect the same dynamic in the housing market.

Results from Home Depot, also out Tuesday, broadly topped estimates and management reaffirmed full-year guidance. However, transactions fell (again) and merchandise inventory exceeded $26 billion, $5 billion more than analysts expected. Ticket growth, the company said on the call, was mostly driven by inflation.

Analysts were characteristically upbeat, using adjectives like “solid” and “strong” to describe Home Depot’s results. Three-year stacked transactions are still positive, and the company’s outlook was seen as prudent. Management said it’s taking a “conservative” approach to guidance. Although DIY buyers are exhibiting “some weakness,” project backlogs are still “healthy.”