Wednesday, March 18, 2009

Housing starts down 47.3% YoY; Permits down 44.2%

The mainstream media is highlighting the volatile month-over-month numbers. Month-over-month housing starts were up in February:
Initial construction of U.S. homes unexpectedly surged in February, after falling for eight months, according to a government report released Tuesday.

Housing starts rose to a seasonally adjusted annual rate of 583,000 last month, up 22% from a revised 477,000 in January, according to the Commerce Department. It was the first time housing starts increased since June, when they rose 11%. ...

Applications for building permits, considered a reliable sign of future construction activity, rose 3% to a seasonally adjusted annual rate of 547,000 last month. Economists were expecting permits to fall to 500,000.

While the surge in new construction was a welcome sign for the nation's battered housing market, analysts warned that the increase could be short lived.

"With new home sales still falling and the months' supply at a record, there is no reason for homebuilding to rise," wrote Ian Sheperdson, chief U.S. economist at High Frequency Economics in a research note. "This is a temporary rebound, not a recovery."
CNBC's Diana Olick explains why February's month-over-month housing starts data constitutes a false dawn:
A surprising housing starts number sent the markets churning and the analysts buzzing, and when it all shook out the takeaway was less than promising. Housing starts bumped up 22% in February from the month before, but broken down, you see that single family starts rose just 1% while multi-family shot up 82%.

How could all this be?

Nishu Sood of Deutsche Bank:

I chalk it up to how low the number had fallen (making the subsequent jump look bigger in percentage terms). Multifamily starts had truly fallen off a cliff in 2H08, so the natural volatility in the series is amplied in percentage terms. Even after this month's jump we are still well below the averages of 2007 and 1H08.

And then of course there was the weather factor: a very cold and wet December and January were followed by a much milder February, so all those homes that didn’t get started in Dec/Jan, hit the dirt in Feb. If you look regionally, the starts were strongest in the Northeast, again where the weather was unseasonably mild in February.

More important to look at is the permits number. Single family permits rose 11 percent nationwide...

So why are permits up? Well, says building analyst Ivy Zelman, "This is supply. It is not indicative of demand." She notes that builders, and the banks funding them, have money in the ground already, in finished lots. "You have to put a house on it. Vertical construction continues even though demand is not strong." If you don’t put a house on it, the land is a total loss. If you put a small, cheap house on it, maybe you can recoup at least the cost.

But the permits number is not good news to J.P. Morgan analyst Michael Rehaut:

We believe a rise in new home inventory would only exacerbate the current downturn. Moreover, we believe these elevated inventory levels will continue given our outlook for weak demand to continue well into 2009, driven by rising unemployment, low consumer confidence, still tight credit conditions, and rising delinquency and foreclosure rates. Accordingly, we reiterate our negative sector stance on both the builders and the building products.
Be wary of any abrupt single-month change in housing stats that diverges from the medium-term trend. We've been down this road before. Single-month improvements don't last when real home prices are still high by historical standards.

The year-over-year numbers tell a much different story than what's in the headlines. In February, building permits were down 44.2% year-over-year, and housing starts were down 47.3% year-over-year. Not so rosy, huh?


  1. Calculated risk has an article on this.

    In a nutshell, we will see a bottom in home starts long before the bottom in home pricing - maybe a year or more.

    Go back to your graphs and assume a similar rate of loss for 2009. Does that put us close to our historical average? If so, this bottoming in starts is a good thing. It signifies that we may not overshoot (prices) on the downside. It is part of the natural correction process.

  2. What I found significant is that starts were so much better than analysts expectations.

    These guys arent stupid. They look carefully at this stuff before making proclimations knowing full well billions of $$ will be traded based on the information. Clearly, they were wrong this time.

    Best at this point to chalk it up as a single data point suggesting a bottom is coming. However, if it continues to improve for the next month or two, its absolutely worth noting.

  3. Housing starts are only possible in outlying areas that haven't already been developed. Therefore, housing starts typically do not include "close in" areas.

    A recent Census Bureau indicates a net population gain of "55,835 (people) in Washington-Arlington-Alexandria, Va." Bringing the total population for those three jurisdiction up to 5,358,130.

    The timeframe for this gain is "from July 1, 2007 to July 1, 2008:"

    Coincidently, those three jurisdictions comprise the "close-in" area for the DC Metro area.

  4. Actually, that population growth is for the whole area. "Washington-Arlington-Alexandria, Va" is shorthand for the entire Metropolitan Statistical Area (MSA), so it includes all the mid suburbs & exurbs as well.

    Core area populations DC, Arlington & Alex (excluding the surrounding burbs) are approximately 905,000. I know they increased, but I dont know by how much.

  5. From the AP article:

    "Well-to-do exurbs around Washington D.C. saw growth declines as people weary of costly commutes moved closer to federal jobs in the nation's capital."

  6. Ahhh - your link was just to a bunch of numerical gains (no text). I think this is the link you want.

  7. This seemed so obvious that I couldn't believe the hype. We need a demand side recovery, not more building. And as long as unemployment doesn't decrease or at least stabilize, there's not going to be enough demand to clear the market. More building to fill vacant lots or finish multifamily units is not a good thing. Its a waste of economic resources to produce more of something we don't need. We have record inventories and record foreclosure rates and people are happy housing starts went up? Ugh.