Housing starts rose 0.2% in July, less than half the expected increase, leaving the annual rate of starts little changed at 1.206 million. 

Still, the second-consecutive reading above 1.2 million, the rise in starts at the beginning of the third quarter marks a near-eight year high. With strong growth early on in the second quarter, the three month average of permits remain elevated, up 1.235 million in July, the second consecutive reading above 1.2 million.

Year-over-year, permits remain in the black, up 7.5% thanks to strength in both single and multi-family permits, up 6.1% and 9.7% respectively.

“The recovery in housing starts continues, as builders respond to improving demand for new-build homes,” says Ed Stansfield, chief property economist for Capital Economics. “The expiry of a tax-break in New York City has distorted the building permit data but other leading indicators, such as homebuilder confidence, point to further steady gains in starts during the second half of the year.

“Housing starts were essentially flat in July, coming in at 1.206 million annualized. However, the estimate for June has been revised up by a substantial 2.6%. As a result, starts are up over 10% compared to a year ago and they are now at their highest level since late 2007,” Stansfield says.

“On the face of it the housing permit data were less encouraging. Permits crashed by over 16% during July, to 1,119,000 annualized,” he says.

On the basis of past form, that would suggest starts could be in line for a modest contraction in August, analysts say.

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. 

Stasfield says that the permits data have been distorted by the expiration in June of a tax-break on multi-family developments in New York City, which led to builders rushing to get their plans approved.

“Indeed, if we strip out the Northeast multi-family sector the data show that permits dropped by a far more modest 4% month-over-month,” Stansfield says. “Therefore we are confident that housing starts can continue their upwards trajectory. Housing demand is being supported by an improving labor market, and with mortgage delinquency rates dropping back close to historical norms, lenders are gaining confidence and have started to loosen their lending criteria.

“That’s not to say housing starts are set to race away. While homebuilders appear to be coping fairly well with labor and material shortages, they are still seen as a constraint on the sector,” he says. “Furthermore, with the Fed set to raise rates in September, the rise in mortgage lending for house purchase is likely to be steady, rather than stunning.”

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.