We got some good news and some bad news today. The good news is that both Housing Starts and Building Permits rose in March. The bad news is that both housing starts and building permits rose in March.
It is good news, since residential investment is historically one of the most important locomotives pulling the U.S. economy out of recessions, and thus far this time around that locomotive has been derailed. It is bad news because we still have an excess inventory of houses, both new and used, particularly if you factor in the massive shadow inventory of used homes where the owners are deeply delinquent on their mortgages or where the banks have already started the foreclosure process.
The real answer to the question of if this is good news or bad news will not come until next week when the New Home Sales numbers are released. If they also increase (a 3.8% increase is expected, but from a record low level), particularly if they increase by more than expected, then today’s numbers will prove to be very good news. If the new home sales numbers disappoint, then the increase in starts is jost going to be prolonging the housing slump.
Underneath the Headline Numbers
To get more specific, nationwide total housing starts were at a seasonally adjusted annual rate of 626,000 in March, up 1.6% from February, and 20.2% higher than a year ago. They were also well over the consensus expectations for 610,000 starts. Actually, since the February numbers were revised sharply higher, from a rate of 575,000 to 616,000, one could argue that the monthly increase was 8.9%.
Most of the increase, though, came from the very volatile apartment and condo area. For buildings with five or more units, starts jumped 39.7% on the month (from the revised levels) but are down 31.8% from a year ago, while single family starts actually fell 0.9% on the month but are up 47.1% from a year ago.
History of Housing Starts
The graph below (from http://www.calculatedriskblog.com/) shows the history of housing starts, both in total and for single family units. Note that even with an increase of almost 50% year over year, single family starts are still roughly at the worst levels ever seen prior to this downturn, and total starts remain far below anything every seen before this downturn.
Then consider how much the U.S. population has grown since the start of the graph in 1968. We do not need to reach very heroic levels of housing starts to generate very large percentage increases. (Even a very small number becomes infinitely large if you try to divide it by zero).
Results by Region
Even though nationwide starts were up, the gains were very concentrated, with starts actually falling in three of the four regions. All the gains came from the South, where starts were up 18.2% on the month and are up 23.0% year over year. The South is by far the biggest, and thus most important, region of the country when it comes to housing data. In March, the region accounted for 53.8% of all housing starts, up from 46.3% of all starts in February.
The South was particularly hard hit by the blizzards in February (they also hit the Northeast, and to a lesser extent the Midwest, but in those regions snow is expected and people know how to deal with it). Thus it is possible that the rise in starts is simply a bounce-back from weather-depressed numbers in February.
The decline in starts on the month was particularly sharp in the Midwest, where starts declined 28.4%, and where they were down 15.3% from a year ago. The Northeast saw an 8.3% drop on the month and the region is off 4.3% year over year. The Northeast is by far the smallest of the four regions when it comes to housing data, responsible for just 10.5% of all starts in March. Out West, starts edged down 2.1% on the month, but are up a very sharp 75.0% year over year.
Building Permit Data
The weather argument does not really hold for the building permit data, though. Yes, having a foot of snow on the ground might hamper the actual digging of a foundation, but it will not stop any builder from going on line and taking out a building permit.
Permits, which are the best short-term gauge of future housing starts, posted an even sharper 7.5% increase on the month, to an annual rate of 685,000, and permits are up 34.1% year over year. The permits were also much higher than the consensus expectations of 625,000 permits. Permits rose in the month both for single-family homes (up 5.6%) and for the apartment and condo sector (up 13.2%). On a year-over-year basis, single family permits are up 50.8% while apartment permits are down 8.4%.
Regionally the numbers for the month were all over the place, with permits in the Northeast plunging 19.5% and permits in the West down 6.7%. However, in the Midwest permits rose 17.6% on the month and they did even better in the South, rising 18.4%.
On a year-over-year basis, however, all four regions are up. The Midwest has seen the sharpest rebound with a 44.6% rise, followed by the South with a 35.3% increase and the West, up 31.1%. The Northeast lags with a year-over-year increase of just 17.9%.
Leaning Positive — Jury’s Out Until Next Week
On balance at this point, I will take a rise in housing starts as being a positive for the economy, but I reserve the right to change my mind if the new home sales data disappoints next week.
Residential investment is a huge swing factor in the economy. Each new home generates a lot of economic activity. Not just the carpenters and plumbers who put it together, but it also generates jobs for lumberjacks working for Louisiana Pacific (LPX), for people making plumbing fixtures working for Masco (MAS) and Fortune Brands (FO).
Those people then go out and spend their money, perhaps eating at the local Olive Garden — part of Darden (DRI) — and generating jobs for the cooks and waiters there. Those jobs will then start to re-stimulate household formation and create some demand for housing. After all nothing will get the kids out of living in the basement after college faster than a steady job so they can afford to have a place of their own.
A Virtuous Cycle?
This is the sort of potential virtuous cycle that could kick the economy into the next gear and make the recovery sustainable even after the government’s training wheels come off.
On the other hand, if new home sales do not pick up, these new starts are just going to add to the inventory situation, putting more downward pressure on housing prices, forcing more homeowners underwater on their mortgages, which will lead to more foreclosures. The result would be a vicious cycle, not a virtuous one, or at least a continuation of the vicious cycle the economy has been in for the last few years.
Whichever way this “chicken and the egg” dilemma plays out will make all the difference in the world to the recovery. So far, the economy has seen a pretty decent rebound even without its normal primary driver of residential investment.
However, the factors that we have seen so far — most notably the inventory cycle — are not sustainable for more than another quarter or two (in the fourth quarter inventories did not actually rise, they simply fell at a slower rate, but that was enough to generate 2/3’s of the total growth in the fourth quarter; in the first quarter we will actually see a rise in inventories, which will add to economic growth).
Economic growth that is simply due to goods piling up on store shelves is not going to be sustained for very long). If we can get household formation going again, then the excess supply of housing will be absorbed. That will mean that we can start to build again, which will create more jobs, and thus more demand. If that cycle can get going, economic growth is going to be much stronger than most people expect.
However, that is a huge IF.