The new data on housing starts have just come out from the Commerce Department, and they showed that activity in October was 11.0% below the September rate, and 1.8% below the year-ago pace. It is important to note right away that most of this large drop month-over-month was due to a yo-yo effect in the apartment numbers. Last month’s count of multifamily starts was extremely high, at 439,000, so it is not too surprising that this latest number gives back a lot of that apparent strength (at 327,000). The apartment market is still booming, mind you, but it is worth noting that the decline partly reflects extraordinary activity a month prior. 

Single-family starts were 2.4% below the September figure, so, down a bit, but not enough to persuade us to alter our view of the trajectory of the housing industry. Single-family starts were up slightly (2.4%) in October versus October a year ago. 

The story varies, of course, by market. Houston is down year-over-year, as expected, due to the dislocation in the energy industry. Washington D.C. is also down, partly due to the job dislocations that followed sequestration. Most markets, however, are up. Most noteworthy, the markets that had suffered huge losses during the downturn are making a comeback. South Florida, Las Vegas, and Phoenix are seeing much stronger demand. Phoenix builders are selling 3.2 homes per month now, which is far higher than this time last year (2014 was a dismal year for Phoenix). The big problem in Phoenix now is finding enough labor to get the houses completed for the willing buyers. 

An outstanding leading indicator for future housing starts is the supply of lots and the pace of lot development. Lot development is positively surging in Austin, Texas, particularly in Travis and Williamson Counties, suggesting a likely imminent surge in new housing starts in those areas. Austin area master-planned communities like Cimmaron Hills, Siena, Paloma Lake, and Sun City have all added lots at a fast pace. 

The latest positive evidence on household formation rates and the increase in entry-level housing demand gives us further confidence in our forecast calling for a continued gradual increase in housing starts. We are starting to see the realization of the prediction we have been making regarding the movement of housing development to the locations further from the downtowns. The next issue to watch:  affordability.