We got some good news and some bad news on the housing front today. The good news is that housing starts rose to a seasonally adjusted annual rate of 591,000 from and upwardly revised 575,000 pace in December, and up 21.1% from the year-ago level of 488,000. The bad news is that housing starts rose to a seasonally adjusted annual rate of 591,000.
OK, confused yet? It is bad news because the U.S. still has a massive oversupply of housing. In the official inventories of new and existing homes for sale relative to the rate they are selling, the months of supply are still well above normal (although down sharply from the peaks). There is also the huge shadow inventory of houses where the owners are far behind on the mortgage payments and foreclosure is just a matter of time.
Under such circumstances, building new homes is a misallocation of resources. There may be local areas where new houses are needed — after all, an empty house outside of Boston is not a good substitute for a house in Austin if your job requires you to live in Austin. Thus housing starts don’t need to fall to zero, but rising home starts do not help the overall supply/demand equation.
So why is it good news? Because, historically, residential investment has been the main locomotive pulling the U.S. out of recessions. Without a recovery in Residential Investment it is very hard to see how the economic recovery can become self-sustaining after the fiscal stimulus wears off.
Just to be clear, as the graph below (from http://www.calculatedriskblog.com/) shows, the overall level of housing starts is still very depressed, both in total and for what most people think of when it comes to housing starts — single family starts. On both counts we are still below the lowest levels on record (back to 1967) prior to this downturn. The housing start numbers are not adjusted for population, either, and if you have more people, you are going to need more places for them to live.
Getting back to the numbers, the 591,000 rate is 21.1% higher than a year ago, but the year-ago number was very depressed. There was a very significant upward revision to the December numbers, which were originally reported as a seasonally adjusted annual rate of 557,000, so the increase in January over where we thought we were in December was 6.1%, not the reported 2.8% increase over the revised number.
Single family starts were up 1.5% over the revised number to a seasonally adjusted annual rate of 484,000. On a year-over-year basis, single family starts are up 35.6%. Given how incredibly depressed the housing market was a year ago, it does not take very heroic levels to generate some very impressive year-over-year gains.
The year-over-year gain in overall housing starts was held back by a 15.3% decline in apartment and condo starts (five or more units). The multi-family numbers are extremely volatile from month to month, and jumped 17.6% over the December level to an annual rate of 100,000.
Data by Region
Regionally, the data was mixed. On a month-over-month basis, the Northeast (by far the smallest of the four census regions when it comes to housing data) was the strongest, posting a 10.0% gain. The West was also strong with a 8.9% rise. Gains in the South, by far the biggest region, were more muted, with just a 1.0% rise. Starts in the Midwest fell 3.2%.
On a year-over-year basis, all regions but the West are now in positive territory. The West is down 11.6% from a year ago. The gains in the Northeast, on the other hand, are an eye-popping 73.7%. However, even with that rise, the Northeast was responsible for only 11.2% of all starts (up from 7,8% a year ago).
The Midwest posted a 56.9% year-over-year increase and the South is up 22.8% from a year ago. This would tend to indicate that homebuilding firms with more of a footprint in the Northeast and Midwest like M/I Homes (MHO) and Hovnanian (HOV) are probably doing better than firms more focused in the West like Standard Pacific (SPF).
Building Permits
So what about the future? Well, the best leading indicator for housing starts is building permits. There, the news was not quite as good (at least in terms of strength; it was better from the inventory reduction point of view). Overall building permits fell 4.9% from December to an seasonally adjusted annual rate of 621,000. However, on a year-over-year basis they are up 16.9%.
In the permits data, the real weakness is in the ever-volatile multifamily segment. On a month-to-month basis they are down 26.2% and are down year over year 43.2% to an annual rate of just 96,000. For the month, single-family permits actually edged up 0.4% to a 507,000 rate, and are up a very sharp 48.2% on a year-over-year basis.
Regionally, the only real strength came from the West on a monthly basis, up 8.5%. The Midwest was the worst hit with a 20.2% plunge, followed by a 17.6% decline in the Northeast. The South was down 1.3% on the month. Compared to a year ago, though, the Northeast is still the strongest with a 27.6% increase, followed by the West, up 20.7%. The South posted a 15.3% year-over-year increase, while permits were up just 9.6%.
Despite my caution about the inventory issue, I would have to say that net-net, this was a good report, and one that the market should like. Take another good look at the graph and notice how housing starts almost always fall sharply before a recession starts (and is arguably the principal cause of recession, or at least the transmission mechanism through which tight monetary policy causes recessions). The exception to the rule was in the 2001 downturn which was a relatively mild affair, mostly due to the dot.com bust.
Housing starts tend to rise fast after recessions end and each new house generates a lot of economic activity (which is why new home sales are a FAR more important number than used home sales, even though there are far more used home sales in any month than new home sales, regardless of the condition of the economy). The prices of used homes are important, since houses represent a very important store of wealth for that vast majority of Americans.
The level of activity in the used home is mostly important to used home dealers (a.k.a. realtors). A used home sale will generate some paint sales. A new home sale means that all the labor, lumber, wall board, brick, appliances and paint used to make the home gets stimulated.
We need for the increase in housing starts to be matched by an increase in new home sales, otherwise we are just going to be back in the soup again with a big inventory overhang. To the extent that happens, then the rise in housing starts is good news for the economy. The upward revision to the December numbers removes a very significant cloud over the direction of the next revision to the 4th quarter GDP numbers. And it should help offset the downward pressure stemming from the worse-than-expected trade data that came out last week.
The year-over-year data reminds us of just how awful things were a year ago. It is a timely reminder coming on the 1st anniversary of the ARRA, a.k.a. the Stimulus Act, being signed into law. Those that say it has had no effect simply are not looking at the data.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
