After a lethargic beginning to the year, housing starts jumped 8.3% in June, halting a three-month slide, the Commerce Department reported in July. Now economists will be watching Wednesday's New Residential Construction Report, known as "housing starts," to see if it indicates the momentum is continuing.
The report is generally seen as an important yardstick for the vitality of the economy, affecting related industries like banking, real estate, construction and manufacturing. Economists estimated Wednesday's report will show an increase of 14,000 housing starts in July.
"July's report will reveal the June bump as either an outlier or a reversal of the industry's caution earlier in the year," said Brian Davis, director of education for SparkRental.com. "So far this year, homebuilders have shifted emphasis away from rental apartments and toward single-family homes for sale. Housing starts for single-family homes have risen 7.9% while starts for apartment buildings have dropped 4.2%."
Davis said that trend was expected to continue in Wednesday's report.
"We are seeing an increase in housing starts on a year-over-year basis," said Rachel Ivers, a salesperson with The Blake Team at Keller Williams and a student at the University of Colorado Boulder, "but still people are complaining that there is not enough affordable inventory."
John Boyd Jr., principal of Princeton, New Jersey-based The Boyd Co. Inc ., expressed similar thoughts.
"We have seen construction of new single-family housing improving over the past year, however at a rather sluggish pace," Boyd observed . "The supply of single-family homes is the lowest since 1999. This is due to increasing demand and weak home construction - rising building costs, rising labor costs and shortage of construction labor."
John Engle, president of Chicago-area family office merchant bank Almington Capital, voiced similar concerns, particularly on the construction labor shortage.
"Housing starts have been lagging for a while now," Engle said, "but it's not really a matter of demand. In fact, demand has been pushing existing home prices up as new housing stock has been slow to meet the needs of home buyers. A number of factors are at play in this. One of particular interest is the increasing cost - and decreasing quantity - of skilled labor. Some have attributed this to a crackdown on immigration and hiring of undocumented laborers, but it represents a secular trend in the domestic labor market. Fewer people are joining the various skilled trades that are crucial to the construction business, thanks to a mixture of factors including the erosion of trade schools and increasing social stigma against trade work, especially in white communities."
Ivers pointed to other factors.
"Income and changing consumer preferences make inventory appear scarce and unaffordable," she said.
"We are starting to see a shift in consumer preferences. Millennials want high density, mixed-use communities where transportation time is kept to a minimum. They don't want uniform, suburban housing where they have to drive 20-plus miles a day to get to the office. Environmental protection is becoming more prevalent to millennials and they want to see this reflected in their housing."
"If homebuilders continue to build track homes, it pushes millennials further from the realm of homeownership," Ivers continued. "It makes housing unaffordable, and it is not within their design preferences. I believe we will continue to see this development for many more years, but we will also see more mixed-use developments as well."
"June's positive data may indicate a real trend signaling builders' confidence in the economy and an eye toward addressing the lack of single family home inventory, especially in key high-growth markets around the country - i.e., the New York metropolitan area, the Dallas Metroplex region, the Bay area, Miami and Chicago," Boyd said. "I will be curious what this month's data shows."
The Commerce Department's New Residential Construction Report is scheduled to be released at 8:30 a.m. Eastern time.
This article first appeared on GuruFocus .