Permits & Starts Fall Again

Highlights include D.R. Horton, Inc. (DHI - Analyst Report), Weyerhaeuser Co. (WY - Snapshot Report), Masco Corp. (MAS - Analyst Report) and Whirlpool Corp. (WHR - Snapshot Report).

Housing starts and permits is one area where "bad news" is really good news. Falling starts and permits will allow the huge inventory overhang of houses to be worked off.

This is not without a cost, however -- it means that the Residential Investment part of GDP is off to a very weak start for the second quarter, and this despite it already being the smallest share of GDP on record in the first quarter.

In April, building permits fell to a Seasonally Adjusted Annual Rate (SAAR) of 494,000, down 3.3% from March and 50.2% below April 2008 levels. This suggests that housing starts will be weak again in May. Most of the decline in permits came from multi-unit structures, aka Apartments and Condos, which plunged 21.6% for the month and are down 66.2% from a year ago.

Single family permits actually rose 3.6% and are down "only" 42.3% from a year ago. Regionally, total permits fell the most in the Northeast with a 7.1% drop, followed by declines of 4.8% in the Midwest and 3.4% in the all-important South region. In the West permits, were unchanged from last month. On a year-over-year basis, things tend to even out more regionally, with declines ranging from 52.3% in the West to 49.1% in the South.

Turning to Starts, they plunged 12.8% from last month to just 458,000, which as the graph below shows (larger version available at http://www.calculatedriskblog.com/) is a record low. Starts are 54.2% below a year ago. However, as with Permits, the damage was concentrated in multi-family structures, dropping an astounding 42.2% in the month and down 74.8% on a year-over-year basis. Single family starts were actually up 2.8% nationwide for the month, but are down 45.6% from a year ago.

Regionally, there were huge disparities (keep in mind that particularly at the regional level the numbers are subject to huge margins of error and can be significantly revised later -- the confidence intervals are much smaller for permits than they are for starts). The Northeast was by far the hardest hit, with starts plunging 30.6% for the month and down 45.7% year over year. The Midwest and the South were also hit hard with monthly drops of 21.4% and 21.1%, respectively. The West was the anomaly, with starts jumping 42.5% on the month.

As with permits, the disparities are much less on a year-over-year basis. The South is down the most compared to a year ago, off 57.0% while the Midwest is down 52.5% and the West is down 52.9%.



While the drop in permits and starts means that we are following the first law of holes -- when you find yourself in one, stop digging! -- it does indicate that residential investment will once again be a significant drag on GDP in the second quarter. These figures are well below anything on record, with total starts below the previous low points in other recessions for single-family starts alone.

It is also bad news for not only the Homebuilders like D.R. Horton (DHI - Analyst Report) but also for suppliers like Weyerhaeuser (WY - Snapshot Report), Masco (MAS - Analyst Report) and Whirlpool (WHR - Snapshot Report).

This recession is substantially different from previous downturns. The only previous downturn that remotely matched the severity of this housing downturn was the double-dip recessions of 1980 through 1983. Mortgage rates were in the high teens back then as inflation was being squeezed out of the system. This one is happening with long-term mortgage rates at generational lows, and the Fed buying up every mortgage-backed security is sight in a desperate attempt to prop up the housing market. So far it does not seem to be working, but on the other hand, we don't know exactly how ugly it would be if the Fed was not taking those "heroic" measures.

Still, it is unlikely that housing starts will fall to zero. An empty house in Detroit is not exactly a perfect substitute for a house in Dallas. There are some people out there who simply have very strong preferences for having new homes. Massive numbers of foreclosures weighing on the used home market can overcome those preferences for many, though.

The second wave of foreclosures is upon us, and this time will not be restricted to the wrong side of the tracks. Most of the option ARMs that are recasting (technically different than "resetting" -- a "recast" is a change in payment, a "reset" is a change in rate, so both can happen at the same time, but don't have to) were made to people in more upscale neighborhoods. These foreclosures will result in even more competition for new homes than the first wave did.

While the reduced supply of new homes will help, the housing slump is clearly not over.