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Market Reporting that Matters

September 2017 Construction Report

Permits and Starts Slow, But Don’t Panic

Tuesday, October 31, 2017

Annual total residential construction starts and building permits slowed compared to last month, according to the latest U.S. Census figures, but for different reasons. Hurricanes Harvey and Irma caused single-family starts to dip in the South, bringing down the total starts figure. Meanwhile, multifamily permits plummeted, dropping total permits in the process.

Despite the September drop, single-family permitting and starts continued their healthy pace on a year-over-year basis, as the housing market’s gradual improvement remained on track.



Top Permitting Places Continue Trend

Residential Construction Job Growth Slowing

By the Numbers

  • The 1.215 million total residential housing units permitted during the 12 months ending in September were, on a seasonally adjusted annual rate (SAAR), down 4.5% from August and 4.3% from September 2016.
    • All of that decrease was due to multifamily permitting, which dropped 17.4% from August’s annual rate to 360,000 units, and was down 25.3% from September 2016. Multifamily permits fell below 400,000 units for the seventh time in 10 months.
    • The annual rate of single-family permits grew 2.4% from that of August at 819,000, and was 9.3% higher than the September 2016 rate. Single-family permitting has exceeded the 800,000-unit level in all but one of the past 10 months.
  • Total residential construction starts of 1.127 million units in the 12 months ending in September were 4.7% less than August, but 6.1% more than September 2016. The annual rate of total starts were lower than most economists’ expectations, with both single-family and multifamily down from last month.
    • Annual single-family starts of 829,000 homes were 4.6% lower than August’s annual rate, but 5.9% more than September 2016’s. Single-family starts have surpassed 800,000 homes in 11 of the past 12 months.
    • Multifamily construction starts of 286,000 units were the lowest annual rate since September 2016 – down 5.8% from August, but up 7.9% from September 2016. Annual multifamily starts are down more than 36% from the December 2016 peak of 449,000 units.
  • Total residential completions of 1.109 million units were 1.1% higher than in August and 10.3% higher than September 2016.
    • Single-family completions were up by 4.6% on an SAAR basis from August, and were 8.8% higher than the September 2016 annual figure.
    • Multifamily completions dropped 7.2% compared to August, but were 17.9% greater than September 2016.

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Other U.S. Census statistics of note, comparing September 2017 to September 2016 annual rates:

  • Total annual residential construction starts in September 2017 were down in the South (-2.2%) because of the aforementioned single-family starts drop. Meanwhile, total starts exploded in the West by 24.8% and increased moderately in the Northeast (4.2%) and Midwest (2.7%).
  • Annual single-family starts were up strongly in three regions: the West (24.8%), Northeast (17.7%), and Midwest (10.5%). The South decreased by -5.6%.
  • Multifamily construction starts declined by double digits in the Northeast (-22.0%) and Midwest (-23.1%), but rose in the South (11.5%) and West (23.8%).
  • Annual total permits decreased by -16.2% in the Northeast, by -5.3% in the South. Permits were down 0.9% in the Midwest, but were up slightly in the Midwest (2.2%).
  • The annual rate of single-family permits increased in all regions, led by the Northeast (32.1%) and followed by the West (14.9%), Midwest (8.8%), and South (4.2%). 
  • Annual multifamily permits fell in all regions with the sharpest slowdown in the smaller Northeast region (-49.5%), and trailed by the South (-24.6%), West (-19.6%) and Midwest (-9.0%)
  • Single-family completions decreased slightly in the Northeast region (-1.8%), but were up in the West (12.6%), South (9.1%), and Midwest (6.8%). Multifamily completions shot up strongly (on an SAAR basis) in the very small Midwest region (513.0%) and increased in the South (14.7%). The Northeast (-29.3%) and West (-28.2%) experienced decreased multifamily completions.


Top Permitting Places Continue Trend

The top 10 Metropolitan Statistical Areas for multifamily permits for the trailing 12 months ending September 2017 were:

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The first nine of the top 10 metros are the same as they have been the previous three months, and the first six remained in order. Atlanta and Austin switched places at Nos. 7-8, while Portland replaced Phoenix at the No. 10 spot. Several of the Nos. 11-20 metros moved up or down one or two spots, with Fort Worth rising to No. 16 from No. 20 and Nashville jumping to No. 18 from No. 24. Meanwhile, Houston continued to tumble, dropping to No. 22 from No. 17 last month. Oakland dropped from No. 16 to No. 19 in September.

Six of the top 10 metros issued fewer multifamily permits in the 12 months ending in September 2017 than they did in the preceding 12 months. Atlanta and Washington, DC experienced double-digit percentage declines. Denver’s multifamily permitting increased by almost 45% for the year ending September, while Chicago and Portland each jumped more than 16%.

Despite moving up in the rankings, Nashville issued permits for 2,528 fewer multifamily units than last year, with significant slowing in Houston (-6,743), Atlanta (-3,092), West Palm Beach (-2,122) and Washington, DC (-2,069). Other metros with more than 1,500 fewer units permitted include Newark, San Diego, North-Port-Sarasota-Bradenton, FL, Anaheim and Orlando.

Multifamily permitting is rising in Denver (+4,189), Minneapolis-St. Paul (+2,424), San Jose (+2,002) and Miami (+1,948). Jacksonville, Chicago, Seattle, Salt Lake City, Oakland and Riverside also recorded at least 1,400 more multifamily permits than last year.

With only four of the top 10 apartment markets reporting increases in annual multifamily permits, the annual total of multifamily permits issued in the top 10 metros – 138,626 – was just 0.6% more than the 137,794 issued in the previous 12 months. The total number of permits issued in the top 10 metros was almost equal to the number of permits issued within the 11th-38th ranked metros. A year ago, permits issued in the top 10 metros almost equaled the 11th-36th ranked markets.

Access the latest permit trends tables in Excel format here.

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Residential Construction Job Growth Slowing

Analysts and economists have discussed the tight labor market for residential construction for several years. With all the apartments built around the country in recent years, and now with the single-family market continuing to recover, surely there is a shortage of labor in the housing industry, right?

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Based on recent data from the Bureau of Labor Statistics (BLS), annual gains in residential construction employment have slowed since peaking at 7.5% in February 2015. The most recent annual increase in residential construction employment was 2.6% in September. Of course, coming off losses of more than 20% during the Great Recession, even moderate gains in employment are welcome. Residential construction is defined here as the combination of Residential Building Construction (NAICS 2361) and Residential Specialty Trade Contractors (NAICS 238001).

Why is annual job growth slowing with residential construction starts increasing? One possible answer is the low unemployment rate for construction workers. Fewer skilled laborers are available to hire by contractors and developers. The chart above shows the decreasing unemployment rate for all construction workers through September’s rate of 5.2% (not seasonally adjusted).

Another potential explanation is a decreasing rate of immigration of construction workers from south of the border (legal and illegal). Many workers left the country in the wake of the Great Recession, and with Mexico’s economy gaining ground, are less compelled to return to the United States. Tack on concerns of immigration crackdowns in today’s political climate, and you have a smaller labor force for construction than in the past.

Interestingly, wage growth for residential construction workers appears to be declining along with job growth. The third line in the above chart reflects this trend. However, if we examine the wage growth series more closely – as in the chart below – we see that wage growth may be stabilizing or normalizing as the market adjusts to the supply and demand of both workers and construction projects. Both the wage growth rate for residential construction from the BLS and the construction & mining 12-month moving average wage growth from the Atlanta Fed's Wage Growth Tracker show wages growing at about 3% annually, well above the annual inflation rate of about 2%.

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Also keep in mind that construction is an industry that occasionally has unreported or underreported compensation that may be keeping reported wage growth down. However, as the economy continues to grow and the residential construction industry along with it, eventually employers will feel more pressure to raise wages in order to attract and keep skilled workers.

By the Numbers

The table below shows multifamily permitting and job gain/growth for some of the top metropolitan areas, with several categorized by state or region.

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The table below highlights multifamily permitting by place. Some of the top places on a trailing 12-month basis through September 2017 were:

  • City of Los Angeles (11,438 units)
  • City of Chicago (8,826 units)
  • City of Denver (8,767 units)
  • City of Seattle (8,035 units)
  • City of Austin (6,207 units)
  • City of Miami (5,979 units)
  • City of Atlanta (5,674 units)
  • Borough of Brooklyn (5,550 units)
  • City of Portland (5,342 units)

The top 40 places (out of 5,073 U.S. Census places) for permitting of properties with five or more units were:

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