While there is ample evidence that the world economy is starting to pick up steam, one of the traditional engines for driving the U.S. economy out of recession is sputtering. Both Building Permits and Housing Starts for September came in well below expectations.
Housing starts nationwide were at a seasonally adjusted annual rate of 590,000, up 0.5% from the 587,000 annual rate in August and down 28.2% from a year ago.
As is shown in the chart below (from http://www.calculatedriskblog.com/) it is not as if housing starts were exactly robust a year ago. At their peak they were over 2.2 million. The number was also well below consensus expectations of a 610,000 annual rate. Making things worse, the August number was revised sharply lower from an initial read of 598,000.
The one silver lining in the starts data is that the weakness was mostly in the more volatile multifamily (apartments and condos with five or more units) sector, which dropped 23.5% for the month to an annual rate of 78,000. This reversed a big increase in August, but multi-family housing construction has come to a near stop, and is down 69.3% from a year ago.
With rapidly rising vacancy rates and rents declining (both rent and owners-equivalent rent used to calculate the CPI fell for the first time in 17 years in September, and regional and anecdotal evidence suggests that the declines are much larger than the CPI data has captured so far), it is probably a good thing over the long term that we are putting up fewer of them. Single family starts rose 3.9% on the month to an annual rate of 501,000, and are down just 8.7% from a year ago.
The weakness in starts will help clear up some of the inventory overhang going forward, but also means we will be getting less of a boost from Residential Investment in growing GDP. Weak starts are not exactly a good thing for construction employment, or employment if firms producing building materials. Also not good for the profits of homebuilders like D.R. Horton (DHI) and Ryland (RYL), or for firms like Masco (MAS).
Regionally, the only area that showed any strength in overall starts was the super-important South region, where starts rose 7.1% on the month, although they are still down 26.5% from a year ago.
Just how important is Dixie to housing? In September it was responsible for 50.8% of all starts.
The Midwest held up fairly well, dropping 1.8% on the month. It is also in the best shape on a year-over-year basis, down 22.5%. The West was hardest hit for the month, with starts falling 8.8% to bring the year-over-year decline to 30.5%. The small Northeast region became even smaller in terms of housing starts this month, dropping 5.5% and down 38.4% from a year ago. The Northeast was responsible for just 11.7% of all starts in September.
The best indicator of future housing starts are building permits, and there the picture does not get much better. Nationwide starts fell 1.2% for the month to a seasonally adjusted annual rate of 573,000, from 580,000 in August and were down 28.9% from a 806,000 annualized rate a year ago. This was also well below expectations of 595,000.
Unlike housing starts, multi-family structures were actually stronger than single-family permits, with permits for apartments and condos rising 7.2% to an annualized rate of 104,000. Single-family permits fell 3.0% for the month to an annualized rate of 450,000. However, on a year-over-year basis apartment permits are much weaker, down 56.5%, while single family starts are down 14.9%.
Regionally, both the Northeast and the Midwest were unchanged on the month, although the Midwest is faring better on a year-over-year basis, down 25.4% while the Northeast is down 32.6%. The South and the West were both down 1.7% on the month and are off 28.8% and 30.0%, respectively, year over year.
As can be seen from the graph, housing starts traditionally start to pick up near the end of a recession and rise sharply as an economic recovery starts. Housing acts as the starter that gets the rest of the economy’s engine running. That starter is having a hard time turning over, and we are going to need a jump from other areas of the economy to really get going.
It is hard to argue that the nation suffers from a housing shortage, so just in terms of raw need for investment, perhaps it is not all that bad a thing that residential investment is not going to be a major part of economic growth going forward, but if it isn’t, what will be?
This is another important reason why this recovery is going to be slower than most periods coming out of recessions, particularly after an inventory restocking period is completed.
We do need more building in the country, but just not of more homes, stores or office buildings — we need to repair our infrastructure, so perhaps investment better sewers and waste water treatment plants could substitute for housing investment, but that would mean more government spending at a time of high deficits at the national level, and state and local governments that are being forced to both raise taxes and cut services due to the economic downturn. Investments in renewable energy and in energy conservation (retrofitting the existing housing stock, rather than building additional units) are another possible alternative.
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