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At 8:30 A.M. (EDT), the first noteworthy economic report of the week was released when the Department of Housing and Urban Development reported data on new residential construction for the month of May. At first blush, the data looked mixed, but our sense is that the slowly evolving recovery in the housing sector is, indeed, under way.

Specifically, the report showed that housing starts in May came in at a seasonally adjusted annual rate of 708,000 homes. While the latest tally was 4.8% below the revised April figure of 744,000, it was still 28.5% above the prior-year mark of 551,000. Meanwhile, building permits, which tend to be a more telling indicator of future construction activity, came in at a seasonally adjusted annual rate of 780,000. That figure was up 7.9% sequentially and 25.0% ahead of the May, 2011 reading. 

A closer examination showed that housing starts were actually up sharply, year to year, in all four regions, with noteworthy advances in the nation’s two biggest housing markets, the South and the West. Housing starts jumped 39.5% and 27.5%, respectively, in those two housing hotbeds. Meantime, building permits, save for some weakness in the Northeast (-8.0%), were up 6.1%, 11.1%, and 10.5% sequentially, in the Midwest, the South, and the West, respectively. The latest data are probably an indicator that homebuilding companies are becoming a bit more optimistic about an evolving recovery in this long-struggling industry.

However, the recent data aside, we still are a bit guarded in our assessment of the homebuilding industry. Some of our caution stems from the recent weakness in the job market—the nation added a paltry 69,000 new positions last month. If the labor market was to continue to weaken in the coming months, it could have an adverse effect on the housing sector. An unemployed individual, and even a person worried about his or her current job status, is unlikely to be in the market for a new home, which for many is probably the big transaction of their lives. 

Nevertheless, the latest data on housing starts and building permits should be considered a step forward for the industry. We will get more insight into how the housing sector is faring later this week when data on existing home sales are released on Thursday.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.