The largest decline was for the multi-family components which soared last month catching up from the winter slows, while single-family building and permits fared better in July, which could relieve pressure on the shrinking inventories in key markets.

Year-over-year, the numbers are still very solid in all regions except Midwest. Despite the volatility, construction activity is in the best year since the recovery began.

“A mixed bag from July’s data, but with the strength we are seeing in homebuilder confidence, which is at its highest level in ten years, we expect to see an ongoing pick-up in starts as we move into the fall,” says Tom Wind, executive vice president of Home Lending at EverBank.

Privately-owned housing starts in July jumped 10.1% from a year ago, and came in at a seasonally adjusted annual rate of 1,206,000.

This is 0.2% (±15.2%) above the revised June estimate of 1,204,000.

Single-family housing starts in July were at a rate of 782,000, which is 12.8% (±9.8%) above the revised June figure of 693,000. The July rate for units in buildings with five units or more was 413,000.

Privately-owned housing units authorized by building permits in July were down though, at a seasonally adjusted annual rate of 1,119,000. This is 16.3% (±1.1%) below the revised June rate of 1,337,000, but is 7.5% (±1.4%) above the July 2014 estimate of 1,041,000.

Single-family authorizations in July were at a rate of 679,000; this is 1.9% (±1.0%) below the revised June figure of 692,000. Authorizations of units in buildings with five units or more were at a rate of 412,000 in July.

“A disappointing rise in housing activity at the start of the third-quarter following several months of robust activity,” says Lindsey Piegza, chief economist for Stifel Fixed Income. “With surmounting weakness in housing permits in particular, momentum in the housing production pipeline appears to be slowing noticeably as we look further out into the second half of the year. 

“Following a general malaise across housing activity at the star of the year, Q2 offered a welcome reprieve,” she says. “That improvement in activity April to June, however, appears to have been short-lived. Homeownership rates remain at multi-decade lows, as does the ratio of first time homebuyers, with housing supply activity supported predominantly by an increasing appetite for rentals, as well as smaller, non-traditional multi-family units such as condos and co-ops.” 

From the Fed’s perspective, monetary policy has the potential to undermine what modest activity is still occurring in the US housing market, Piegza says. Rising rates, even a minimal increase, can create an undue burden to potential homebuyers further reducing expected activity for the latter portion of 2015 and beyond.

“Many housing markets are still building well below their historical norm. Trulia’s analysis of permit activity shows that 7 in 10 homebuilding markets t are building below their long-run norm,” says Selma Hepp, chief economist for Trulia. “Most simply, areas with slower home price appreciation and fewer new jobs are still the construction laggers, but also the markets with some residual distressed inventory since the housing bust.” 

 “Single-family construction starts are moving up ever so slowly, and reached 782,000 annualized units in July 2015,” Hepp says.

The single-family component is still well below historical norms even in metros seeing improvement in annualized permit activity. Only 13 out of the 100 largest U.S. metros saw increases in single-family construction over their historical norms, most notably in Austin, Houston, Charleston and Nashville.

“The annual growth in multi-family home construction has slowed markedly but in line with expectations, particularly among 5+ units construction which recently reached highest levels since mid-1980s,” Hepp says.

In 53 out of the 100 largest U.S. metros, builders are now building more than their historical average. In some of the top 10 markets, multi-family construction was higher than the historical norm by several fold, Hepp says.

For example, New York’s activity is more than four times higher, while both Boston and Newark are almost three times higher.  In many of these markets, multi-family construction is reaching a cyclical peak and will soon see some slowdown.