U.S. housing starts rose last month to the highest level in a year, a sign that builders are getting back on track after hurricanes lashed the southeast and dampened residential construction activity in September.
Housing starts increased 13.7% in October from the previous month to a seasonally adjusted annual rate of 1.29 million, the Commerce Department said Friday. Residential building permits, which can signal how much construction is in the pipeline, jumped 5.9% to an annual pace of 1.297 million last month.
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Economists cautioned against being too optimistic about the uptick, however, because it was driven largely by a 37% increase in multifamily starts, which tend to be highly volatile. Single-family starts rose 5.3% from the previous month.
October starts for single-family homes in the South were at the highest level in a decade, increasing 16.6% from September. September starts were held down by the effects of hurricanes Irma and Harvey.
"It was a little bit of a dead cat bounce after the hurricanes," said Terrell Gates, CEO of Virtus Real Estate Capital, a private-equity firm that invests in housing and other assets.
Housing-starts data are volatile from month to month and can be subject to large revisions. Looking past monthly volatility, overall starts in the first 10 months of the year were up 2.4% from the same period in 2016. Single-family starts were up 8.4% through October, while multifamily starts were down 9.9%.
Those trends are likely to continue as multifamily developers pull back due to a glut of new luxury construction and single-family builders continue to ramp up in response to low unemployment, increasing wage growth and demand from millennials.
"All these things are suggesting we'll continue along this growth trend in 2018, with the wild card that we have to see how tax reform will play out," said Robert Dietz, chief economist at the National Association of Home Builders.
Mr. Dietz said tax reform could have a significant impact on home building, especially in high-cost markets such as California. The House bill proposes to halve the amount of mortgage interest that is deductible to $500,000 and the Senate bill would eliminate the deduction for state and local taxes, both of which could depress demand for more expensive homes. Provisions in the House bill also could significantly reduce affordable-housing production and have an impact on multifamily construction overall.
New residential construction hit a postrecession high in October 2016 but has trended lower since, and remains far below the levels reached during the bubble years leading up to the 2008 financial crisis.
Labor shortages, rising land costs and increasingly restrictive land-use regulations have helped create a shortage of inventory that is driving up home prices much more quickly than wages and inflation.
The National Association of Realtors reported last month that homes are spending just three weeks on the market, the shortest period in three decades.
"We have to really put these numbers into the big picture. People are scrambling for housing right now and it's become really tough, and even tougher in the last year," said Robert Frick, corporate economist with Navy Federal Credit Union.
Starts rose in October for single-family construction and increased for multifamily construction. Permits last month were up for buildings with multiple units and rose for single-family homes.
Separate data showed home builders are feeling better about the market this fall. Home-builder confidence in the market for newly built single-family homes rose this month to the highest since March, when the index touched a post-housing-bubble peak, the National Association of Home Builders said Thursday.
"Home builders are building, and that signals greater confidence in the economy ahead," said Chris Rupkey, chief financial economist at financial firm MUFG.
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(END) Dow Jones Newswires
November 17, 2017 10:43 ET (15:43 GMT)