In April, Housing Starts rose to a seasonally adjusted annual rate of 672,000, up 5.8% from the 635,000 rate in March, and up 40.9% from the extremely depressed 477,000 rate of a year ago. If one factors in the revisions to the March numbers, the report looks even better, as those were originally estimated at 626,000. Thus, the April numbers are 7.3% above where we thought we were yesterday.
The April numbers came in well ahead of consensus expectations for a 655,000 rate. Gains were even stronger if one just looks at single-family houses and excludes the very volatile apartment and condo starts numbers. Single-family starts were up 10.2% on the month and are up 53.5% from a year ago. Starts in buildings of five or more units were down 23.6% on the month and off 15.0% for the year.
Gains By Region
The biggest gains were in the smallest region, the Northeast, where starts jumped 23.9% on the month and are up 66.0% from a year ago. However, even with the outsized gains, the Northeast still only accounted for 12.4% of all starts in April, up from 10.5% a year ago.
The Midwest followed with a gain of 16.7% on the month and up 25.0% from last year. The largest and thus most important region, the South, posted a 7.0% gain for the month and is up 59.6% from a year ago. In April, the South was responsible for 54.6% of all housing starts. Things were not going quite as well out West, as starts fell 13.3% on the month and are up just 3.5%.
The Homebuyer Tax Credit Factor
The big jump in starts is probably related to the end of the homebuyer tax credit. The fact that starts are up is not unambiguously good news, as there is still a large inventory of both new and used homes on the market, but recently new home sales have picked up. How much of that pick-up in sales was due to the tax credit will be answered over the next few months.
If the sales pick-up can be sustained, then the rise in starts is extremely good news. It means that one of the traditional engines of growth out of a recession is starting to rev up. The effect of residential construction coming out of most recessions should not be underestimated, and if the new sales are sustained, then residential investment could easily pick up the torch from the government stimulus that has provided so much help in starting the recovery — but which is going to start to wear off in the second half of this year.
If new home sales fall back, then the new homes being built will simply add to the inventory glut, which will put more downward pressure on housing prices. That puts pressure on the wealth of millions of Americans for whom the equity in their house is, or at least was, their main store of wealth. Each time housing prices fall, more people see their houses go underwater on their mortgages, and those that are already underwater find themselves at an even greater depth.
In theory, when people have positive equity in their houses, there should never be a foreclosure, since selling and keeping at least some cash is better than letting the bank take over and having no cash. If a house is deeply underwater, the economically rational thing for a homeowner to do is simply to stop paying their mortgage and save their money until the sheriff comes to the door to evict them. While that might be the right course of action for the individual, it is a nightmare for the economy.
Building Permits
The news on Building Permits, which are the best forward-looking indicator of housing starts, suggests, though, that the surge in starts is temporary and is related to the end of the tax credit. Building Permits tumbled 11.5% on the month to an annual rate of 606,000 from 685,000 in March, but are still 15.9% above year ago levels. Single-family permits held up a little better, falling 10.7% on the month and up 22.5% year over year, while the ever-volatile multifamily permits fell 14.9% on the month and are down 4.6% year over year.
By region, the biggest decline was in the West, where permits fell 16.0% on the month but are up 12.0% from last year. In the important South region, permits were down 14.3% for the month and are up 12.1% year over year. The Northeast saw permits decline 7.4% on the month, and they are up just 8.6% year over year. The Midwest fared the best, with monthly permits unchanged and up 37.6% year over year.
The fall in permits does assuage some of the fears of an excessive inventory build up, but also greatly tempers the good immediate news for the economy in the form of higher housing starts. Each home build generates a huge amount of economic activity. First and foremost it creates jobs, and relatively good-paying jobs, especially for those who do not have college educations.
Construction Industry & the Economy
The construction industry has probably been harder hit in this downturn than any other industry, and construction workers probably make up a good chunk of the long-term unemployed. Putting these people to work, then, creates more jobs when they actually go out and spend their money, perhaps employing the extra delivery guy at Domino’s Pizza (DPZ) or causing sales to be a bit higher at Big Lots (BIG) and keeping that store open. The contractors will be heading down to Home Depot (HD) a lot more, as well.
Beyond that, each house uses a huge amount of materials, so it will help out firms like Wallboard maker USG (USG) and lumber companies like Louisiana Pacific (LPX). Those firms will also employ more people, who will in turn go out and buy stuff, thus stimulating other jobs.
The increase in jobs could have an additional beneficial effect. It could raise the rate of household formation. That is essentially “economist speak” for getting Junior out of Mom’s basement and into a place of his own. With a job, that becomes possible. As he moves out, he creates a demand for a new place to stay and thus helps to absorb some of the inventory overhang.
That, in turn, will allow for still more new home construction without the inventory concerns. The vicious cycle we have lived through over the last three years finally has a chance to turn into a virtuous cycle.
As the graph (from http://www.calculatedriskblog.com/) below shows, housing starts remain extremely depressed, with total starts still far below the lowest point every recorded prior to this downturn. Single-family starts are just a little above the worst point of the 1982-83 recession. That was the one where Paul Volcker pushed up interest rates to the point where a 30-year fixed mortgage would cost you more than 15%.
The population of the country was also much smaller back then, and fewer people need fewer houses. One does not have to make very heroic assumptions about the level of housing starts in the future to generate some very large percentage increases. While I doubt that we will see single-family starts rise back above the 1.5 million level where they were during the bubble, seeing them back above a 1 million annual rate at some point during 2011 does not seem that much of a stretch. That would be an 86% increase.
An 86% increase in housing construction would sure go a long way towards making this a sustainable economic recovery, even with the headwinds from declining stimulus funding and the higher dollar due to the problems in Europe.
It is not a slam dunk that this will happen, at least not that it will happen right away. Much will depend on the new home sales data that comes out next week. It is, however, a real possibility. The permits data indicate that there will be at least a bit of a hangover from the tax credit party, so starts will probably slow a bit in May, but it does look like we have turned the corner.
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.
