Dive Brief:

• Housing starts dropped 2.6% in April to a seasonally adjusted annual rate of 1.172 million from March's downward-revised 1.203 million, the Commerce Department reported Tuesday. April's figure is 0.7% ahead year-over-year.

• Building permit authorizations, an indicator of future construction activity, cooled in April, falling 2.5% from March's rate of 1.260 million to 1.229 million for the month but coming in 5.7% above the year-ago mark.

• Single-family starts rose modestly in April, increasing 0.4% to 835,000 from March's upward-revised rate of 832,000 and 8.9% ahead of a year ago. Multifamily starts continued to decline, falling 9.6% from March's downward-revised rate of 363,000 to 328,000 starts in April. Multifamily starts are 14.6% behind a year ago.

Dive Insight:

Housing starts missed analyst predictions for the second-straight month in April, according to MarketWatch, which had forecast a rate of 1.26 million starts for the month. Starts activity from January through April of this year was 6% higher than the same period last year, MarketWatch reported, and permit authorizations are ahead by more than 10%, indicating that the housing market is still on the path to recovery. 

Single-family job sites were busy early this spring following a mild winter and overall optimism in the residential sector, and analysts expect that confidence to hold as long as high demand for housing persists. A two-point lift in May's National Association of Home Builders/Wells Fargo Housing Market Index suggests strong demand is buoying optimism. The increase brought the measure to a mark of 70, representing the second-highest reading since the Great Recession. And with sales expectations for the next six months and current sales conditions both on the rise, observers anticipate more residential construction activity in the coming year.

Still, supply-side challenges threaten to slow that activity. The lot and labor shortage, along with rising material prices and uncertainty over the effects of the Canadian softwood lumber tariff could increase builders’ costs and extend project timelines.

Lumber prices hit their highest levels since September 2004 in April, rising 10.4% in the first four months of 2017. The lumber price growth, fueled by an ongoing trade dispute between the U.S. and Canada, could increase further with the likely announcement of more duties next month. The import taxes could drive a domestic supply shortage until U.S. manufacturers sufficiently increase their production.