Is the Housing Recovery Slowing Down?

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Higher interest rates continue to weigh on the real estate market as housing starts in the United States were weaker-than-expected last month. Builders broke ground on houses at a seasonally adjusted annual rate of 891,000 units in August, representing a 0.9 percent rise from the downwardly revised July estimate of 883,000 units, according to the U.S. Department of Commerce. Compared to last year, overall housing starts were up 19 percent.

The results were below estimates for the fifth consecutive month. On average, economists expected overall housing starts to increase to a rate of 917,000 units. Groundbreaking on multi-family units, which have been a large driving force in housing starts as investors purchase rental units to create cash-generating investments, struggled in the wake of higher interest rates.

Single-family housing starts, the largest segment of the market, increased 7.0 percent in August to an annualized rate of 628,000 units. Single-family starts have posted a decline in four of the last six months. In July, higher interest rates pushed single-family starts to their lowest level since November. Meanwhile, breaking ground on multi-family homes with at least five units sank 9.4 percent to 252,000 units, compared to 278,000 units in July.

Adding to the weakness, new building permits — an indication of future construction — dropped 3.8 percent to an annualized rate of 918,000 units in last month, missing estimates calling for a rate of 950,000 units. Building permits for single-family homes edged higher from 609,000 units in July to 627,000 units in August.

Overall, construction began on 780,000 units in 2012, a significant increase from 608,800 units in the prior year, but still below the historic average of 1.5 million new homes per year since 1959. Housing starts reached 2.07 million units in 2005. The pace of home construction reached its low point in 2009, below 500,000 units.

Wall Street was relatively quiet after the report. Shares of home improvement names Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) traded mostly flat. Meanwhile, home builders D.R. Horton (NYSE:DHI) and KB Home (NYSE:KBH) shares both fell about 1 percent. Home Depot and Lowe’s have been among the best performing names in the housing industry this year.

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