Increasing Starts - NOT Good News

This is simple economics, folks -- if a market is over-supplied, the last thing you want to see is more supply. This is particularly true when the item in question is not just a consumer good, but the single-most important asset for the vast majority of Americans.

The price weakness of that asset is causing major problems throughout the financial system. It is thus with dismay that I greet the news that housing starts leaped by 17.2% in May from April, and that the increase seemed fairly broad-based -- all four regions reported increases.

There were significant regional variations.  In the West, housing starts jumped and incredible 28.6%, followed by the South with a 16.8% increase, and the Midwest with an 11.1% rise. The Northeast lagged well behind with just a 2.0% increase. In absolute terms, overall starts were at a seasonally adjusted annual rate of 532,000 in May vs. 454,000 in April (revised down slightly from the initial read of 458,000).

In the West, starts rose to 144,000 from 112,000 last month, while in the South starts were 257,000 vs. 220,000 in April. Starts in the Midwest rose to 80,000 from 72,000, while in the Northeast starts rose to 51,000 from 50,000.

Most of the nationwide increase came from multi-unit structures (Condos and Apartments) which is a very volatile number. The 77.1% increase in May over April did not even bring it back to the March level.  Even so, single-family starts rose 7.5% to a rate of 401,000.

While the short-term news is bad, over the longer term starts are way off and we have started to make a dent in the huge inventory overhang of new homes. Since a year ago, nationwide starts are down 45.2%, with declines ranging from down 58.5% in the Northeast to off just 33.9% in the West. The Midwest is off 42.0% while the super important South region is off 47.8%.

Nationwide, single family starts are down 40.9% year over year, while structures with five or more units are down 54.6%.  As the chart below (from
http://www.calculatedriskblog.com/) shows, a year ago was not exactly the top of the market.



Turning now to permits, the best indicator of what lies ahead for housing starts, it looks like the inventory build will continue in June, but not at quite the absurd rate of May. Total permits were up 4.0% nationwide, but unlike the start numbers, single family permits were up more than apartments and condos, rising 7.9% vs. a 9.8% decline for five or more unit structures.

Again, the apartment construction numbers can be very volatile. On a year-over-year basis, permits are down 47.0%. Regionally, the biggest increase in permits was in the Midwest where they rose 8.9%, while the smallest rise was in the South with a 2.3% increase. The Northeast was up 5.7% while the West was up 3.8%.

On a year over year basis, nationwide total permits are down 47.0%, with single-family permits down 35.1%. The Northeast is down the  most (-60.0%) and the Midwest is down the least (-40.3%). The South is down 42.5% while the West is down 52.4%.

While this might be good news in the short-term for the homebuilders like Lennar (LEN - Snapshot Report) and D. R. Horton (DHI - Analyst Report) that are struggling to survive this historic downturn, in the long term it does not make the overall housing market any healthier. It simply means that the pressure on housing prices will continue a bit longer than otherwise would have occurred.

This means more and more housing equity wealth is evaporating, thus damaging more and more retirement dreams and hopes of college education for the kids. It also means that the housing price part of  the assumptions that went into the "stress tests" for the big 19 banks like Bank of America (BAC - Analyst Report) and Wells Fargo (WFC - Analyst Report) will continue to track closer to the "more adverse" scenario than the baseline scenario.