Housing starts fell in May after last month’s double-digit gain, but at the same time there was a big push in permits for future construction – a surge taking permits to near the highest its been since late 2007.

Starts dropped 11.1% to a seasonally adjusted annual pace of 1.04 million units, the Commerce Department and Department of Housing and Urban Development said.

That drop offset the gains in April, when starts were revised up to a 1.17 million-unit rate.

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 1,275,000. This is 11.8% above the revised April rate of 1,140,000 and is 25.4% above the May 2014 estimate of 1,017,000.

“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 realtor.com 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 said. “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.  In today’s construction environment, permits are pulled when new contracts are in place for new homes.  I’m not concerned about the month-to-month decline in starts. Instead focus on the permit numbers, which are up 25% year-over-year.”

The drop in starts but gain in permits reflects homebuilder confidence for the future, which yesterday was reported as a 2015 high for May.

“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,” said Quicken Loans Vice President Bill Banfield. “Another ray of sunshine in this report is the rise in building permits, signaling continued growth.”

EverBank Executive Vice President of Home Lending Tom Wind said overall the report looks solid.

“While the unexpectedly low housing start numbers raised a few eyebrows among the industry, we remain encouraged by the overall strong spring home buying season and see this as a small hiccup in what has been an otherwise steady housing market recovery,” Wind said.

Single-family authorizations in May were at a rate of 683,000; this is 2.6% above the revised April figure of 666,000. Authorizations of units in buildings with five units or more were at a rate of 557,000 in May.

“Notably, unlike that speculation-driven period of 2003-2005, builders today are predominantly building to signed contracts, and we expect permits and starts to continue to post gains throughout the year following continued strength in traffic and sales.  For 2015, we expect single family permits to end above 750,000, which would mean a stronger second half of the year to offset the slower level of activity in the first quarter.  Total permits this year should end close to 1.26 million, an increase of 20 percent over 2014.  Total starts will follow, expected to be up 14% over last year,” Smoke said.

Single-family housing starts in May were at a rate of 680,000; this is 5.4% below the revised April figure of 719,000. The May rate for units in buildings with five units or more was 349,000.

Privately-owned housing completions in May were at a seasonally adjusted annual rate of 1,034,000. This is 4.7% above the revised April estimate of 988,000 and is 14.5% above the May 2014 rate of 903,000.

Single-family housing completions in May were at a rate of 635,000; this is 5.2% below the revised April rate of 670,000. The May rate for units in buildings with five units or more was 392,000.

“Following a brief rebound in housing activity post Q1, activity has slowed. With a tremendous amount of volatility month-to-month over the past 12-24 months, starts are still unable to gain significant momentum off of the 1 million unit pace,” said Stifel Chief Economist Lindsey Piegza. “New supply will be further bolstered in the future as new demand enters the market. However, consumer demand remains modest, particularly for large ticket items such as housing, against the backdrop of limited savings and minimal income growth.”