This morning’s release of data on Building Permits and Housing Starts show that the housing sector rebounded in November after an awful October.

Looking first at Housing Starts, they rose by 8.9% to an annual rate of 574,000 up from 527,000 in October. The October number for housing starts was originally reported as 529,000. The rate last month was 12.4% below the 655,000 rate of a year ago (and over 2 million at the peak).

The gains were widespread, will all four regions posting housing starts gains for the month. Leading the way was the Northeast, which saw a 16.4% rise in housing starts on the month and is now seeing housing starts at a rate that is 14.3% above year-ago levels. That is nice to see, but keep in mind that a year ago was not exactly a boom time for housing starts.

The Northeast is also by far the smallest of the four regions when it comes to housing starts data, particularly new housing starts data. Even with the increase, it represented only 11.1% of the total housing starts in the country (up from 10.4% last month).

However, right behind the Northeast was the South, which is by far the largest region of the country when it comes to new housing starts. There housing starts rose by 12.3% on the month but remain 15.2% below year-ago housing starts levels. The South was responsible for 52.4% of all housing starts in November. The Midwest lagged well behind with a 3.0% on the month, but with housing starts just 2.8% below year-ago levels. The West fared the worst on the month with just a 1.9% rise, which left housing starts 23.4% below last year’s levels. 

However, the big story this month is not in the regional variations, it is in the difference between single family housing starts and apartment (and condo) housing starts. Single-family housing starts were up just 2.1% from October and are now actually above the year-ago levels (by 5.3%) for the first time in recent memory.

The bulk of the increase in housing starts was due to the very volatile 5+ unit building category. There housing starts soared 62.7% in November relative to October. While impressive, it only partially restores the level after two months in a row of very sharp month-to-month declines, and is still below the level of August. It is also 53.9% below the pace of multifamily construction a year ago.

Given the record levels of vacant apartments, perhaps building lots more of them is not really such a good idea. However, as indicated in the graph below (from http://www.calculatedriskblog.com/), single-family housing starts make up the overwhelming majority of the total.

Turning next to Building Permits, which are the best indicator of future housing starts, they also rose for the month. Nationwide, building permits rose 6.0% from October but were down 7.3% from a year ago. Regionally the South led the way in building permits, with a 10.7% rise for the month, which left building permits levels just 1.6% below last year’s level.

The Northeast followed with a 4.7% gain in building permits for the month and left building permits 6.9% below year-ago levels. The West saw a 2.7% gain in building permits on the month, but building permits there are still 26.0% below last year. The Midwest fared the worst for the month, with a 1.9% decline in building permits, but it is the only region where building permits are actually above last year’s levels (by 4.1%).

The increase in New Home sales last month makes the rise in housing starts and building permits much less of a long-term problem than it would have been if new home sales had stayed depressed. Thus we are free to focus on the more positive aspect of the rebound in building permits and housing starts.

These are not insignificant. Traditionally, Residential Investment is the part of the economy that leads coming out of recessions. New housing starts and building permits rising are a direct indication of Residential Investment going up. Residential Investment was actually a slight positive to GDP growth in the third quarter after having been a major drag on the economy for over three years. The November numbers in starts and building permits indicate that it will be additive to growth in the fourth quarter as well.

Also, a rise in housing starts and building permits means jobs for construction workers, and for those firms like LSI Industries (LYTS) which make the lighting fixtures that go into the new homes. It is also a positive for the soon-to-be-merged Black & Decker (BDK) and Stanley Works (SWK), since those construction workers will presumably need new tools to work with. All three of those firms hold the coveted Zacks #1 Rank. Housing, and housing starts, have been at the heart of the recession, and this report indicates that it will at least participate in the recovery.

Substantial headwinds still exist, as mortgage delinquencies continue to rise, foreshadowing another huge wave of foreclosures in 2010. Those foreclosures will be in competition with new housing starts and will keep up the pressure on housing prices. In other words, we are not out of the woods yet, but at least we have found a clearing in those woods.

Given how weak housing starts and building permits were earlier in 2009, it is very likely that they will turn very positive on a year-over-year basis in the months to come, even if housing starts are unchanged on a month-to-month basis. That said, Residential Investment is in no danger of going back to the over 6% of GDP level it was at during the peak, or even its long-term average of about 4.6% of GDP, anytime soon. It also will not remain at record low levels of below 3% of GDP forever. It does not even have to recover halfway to provide a significant boost to the economy.

Even if we were only to see starts rebound to the 1 million level, which would still be historically depressed (especially since the numbers are not adjusted for a growing population), it would still provide a substantial lift to the economy if it were to happen by the end of 2010.

Put this report in the plus column.


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