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Builder and couple at new home under constructionRecently reported May housing starts showed an 11.1 percent drop in new home construction nationally, falling to a seasonally-adjusted annual rate of 1.036 million units. The drop from elevated April results was broad, with a 5.4 percent dip in single-family and a 20.2 percent plummet in multifamily. However, this dip is not necessarily bad news, say many industry experts.

“Today’s data on new construction in May signals strong consumer demand for both apartments and single family new homes and healthy market fundamentals,” said Chief Economist Jonathan Smoke.

“The increasing level of new construction is entirely consistent with the strong demand and corresponding price gains we have been seeing in both rents and home prices.  Given the tight supply conditions in many major markets, signing a contract on a to-be-built home is one of the ways consumers can avoid being outbid in the quest to buy a home.  Builders are more confident as a result of seeing more traffic. Indeed, the last time that NAHB’s housing market index, the leading measure of homebuilder sentiment, was higher than yesterday’s reported number, was in 2005 at the height of the housing bubble.  Likewise, apartment owners are encouraged by lower vacancies and higher rents,” Smoke stated.

We shouldn’t focus too much on the drop in home construction in May, as it was exaggerated by the prior month’s revision and the level is still higher than we saw last year,” says Quicken Loans Vice President Bill Banfield. “Another ray of sunshine in this report is the rise in building permits, signaling continued growth.”

“Permits lead starts and are far more consistent gauge month to month as they are less likely to be impacted by weather compared to starts, which by definition involve breaking ground,” says Smoke. “In today’s construction environment, permits are pulled when new contracts are in place for new homes,” notes Smoke. “I’m not concerned about the month-to-month decline in starts. Instead focus on the permit numbers, which are up 25 percent year-over-year.”

Stay tuned to RISMedia for continuing coverage of housing data reports.