Sponsored Links 
Housing Starts Up, Permits Down
Print
ShareWe got some very nice news on the housing front this morning. Housing starts rose in September to a seasonally adjusted annual rate of 658,000 from 572,000 in August -- an increase of 15.0%. Also, the August numbers were revised slightly higher from 571,000.
The number was also well above the expected level of 595,000. Relative to a year ago they are up 10.2%. It is also the highest level of starts since October 2008, as the financial crisis was in full swing.
While the direction is both good and better than expected, at least from a near-term economic growth point of view, the level is still awful. It does, however, mean more inventory is the pipeline, so there is a bit of a trade off. Better economic growth now, but slower progress on resolving the overall housing problem. I suspect, though, for construction workers -- who have been as hard hit as any group in the downturn -- that is a trade-off they are happy to make.
Breaking It Down a Bit
While the overall news was good, most of the improvement came from the very volatile multi-family sector. If one looks at only single-family houses, the picture was not nearly as strong. Single-family starts rose to 425,000 from 418,000 in August, a rise of 1.7%, and down 4.9% from a year ago. The June numbers were revised up by 1,000 so one could see it as an increase of 8,000.
The volatile multi-family (Apartment, Condo and Co-op) sector soared by 53.4% to an annual rate of 227,000. Year over year, multi-family starts are up 57.6%. As welcome as the numbers are, one should keep in mind that there were some serious weather issues in August (Hurricane Irene) so it could be that some of the starts that would have happened in August were simply pushed into September.
Housing Starts: Awful
The level of housing starts is still awful. The extremely weak rate of new home construction is a major drag on the economy. It is the principal reason that this recovery feels so anemic. We still face an inventory glut, so a weak homebuilding industry is a key part of the repair process for the housing market. However, several years of low starts has started to put a dent in the backlog. After all, the population does continue to grow.
The inventory glut is concentrated in the used home segment of the market, and that is also where the “shadow inventory” resides. New home inventories are actually near historic lows in absolute terms. The absolute level of used homes on the market is not particularly high, especially if just measured by those that are currently listed.
Inventories are, however, still high relative to the current sales rate. Used homes are pretty good substitutes for new homes, but only if they are in the same market. An empty used house in North Carolina is a very poor substitute for a new house in North Dakota. Housing starts peaked in June of 2006 at an annual rate of 2.273 million. We are thus 71.1% off of the peak levels.
Lower starts, however, will only bring down inventory levels as long as new home sales do not also come down. The level of housing starts has been very depressed for almost three years now, and the overall inventory situation (new and used) is still bad relative to the sales rates. That means downward pressure on prices.
We will find out about the level of used home sales (and very importantly, inventories) tomorrow and new home sales next week. It is expected that used home sales will edge down to an annual rate of 4.95 million in September from 5.03 million in August.
It is hard to overstate just how important housing starts are to the economy. Yes, at this point, residential investment has declined to the point where it looks almost insignificant, just 2.23% of GDP in the second quarter, down from 6.34% of GDP at the height of the housing bubble.
However, historically, residential investment -- of which new home construction is the largest part -- has always been the main locomotive in pulling the economy out of recessions. Take a good hard look at the first graph below (from http://www.calculatedriskblog.com/) and the relationship between when the lines bottom and the light blue recession bars. If you want to know why this recovery seems so anemic, look no further than this graph.
Loading Stories...
More Zacks Resources
More Zacks Links
| Market Summary | Feb 22, 2012 12:26 pm ET |
-30.99