MacroScope

Making sense of bounce in U.S. housing starts

December 20, 2011

Surprise! There’s some life in housing after all. U.S. construction starts and building permits jumped to a 1-1/2 year high in November as demand for rental apartments rose, suggesting a downtrodden housing market may be entering a tentative recovery. But will this be another in a long string of bottom-bounces? Or is it the start of a trend

Starts surged 9.3 percent to a seasonally adjusted annual rate of 685,000 units last month, the highest level since April last year and well above the Reuters consensus forecast of 635,000. Stephen Stanley at Pierpoint Securities was reticently enthusiastic:

Could it be? Is the housing sector finally beginning to stir? It is a little premature to declare victory, but the data are starting to point to some stirrings in residential construction activity. To be sure, we should not be entirely surprised. New home inventories are far and away lower than they have been in decades.

Still, Stanley was all too aware of the sector’s worst kept secret – a stalled foreclosure process has the potential to delay a broad-based recovery for a while to come.

Of course, there is that nasty little overhang of existing homes associated with the ongoing foreclosure wave. While home buyers are slowly chewing through this problem, much more remains to be dealt with. Nonetheless, as time goes on, foreclosed homes are becoming an increasingly less appealing substitute for a new home. Some folks simply want to live in a new house, and for them, a foreclosed home won’t do. As a result, I am not surprised that housing starts, new home sales, homebuilders’ sentiment, etc. are starting to move somewhat higher even though the foreclosure problem is not yet completely resolved.

Another caveat on the rosier-looking figures, from JP Morgan analyst Daniel Silver — the key sources of improvement in the report came from multi-family starts, which he says tend to be more erratic. Some more details from Silver’s research note to clients:

These increases were largely driven by sizable gains related to multifamily starts and permits, but single-family starts and permits increased as well during the month. Although single-family starts and permits remain depressed by historic standards, there has been some modest improvement in the data over the past few months. […] Other data on mortgage purchase applications and homebuilders’ sentiment (reported separately) signal that we could see some more improvement to come; however, the November gap between permits and starts in permit-issuing areas points to a slowdown in single-family starts in the very near term. Multifamily starts and permits have trended higher throughout most of the recovery, though the monthly readings are often volatile.

Many economists believe a housing recovery is key to a sustained expansion for the United States. It’s little wonder they get all excited when things start to look a bit brighter, even if only relative to a very depressed point of comparison.

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