Housing Starts rose in June to a seasonally-adjusted annual rate of 629,000 from 549,000 in May, an increase of 14.6%.
However, the May numbers were revised lower from 560,000, so it is possible to see the increase as 69,000, or 12.3%. Relative to a year ago they are up 11.8%.
Quite frankly, a year ago was also a pretty lousy time for the home builders, so the rise is off a pretty easy comp. Still, any increase is very welcome given the extremely depressed state of the housing industry. Provided, of course, that the homebuilders can actually sell the new houses they are building. We will find out about new home sales next week.
If one looks at only single family houses, the picture was also encouraging. Single family starts rose to 453,000 from 414,000 in May, a rise of 9.4%, but up only 0.4% from a year ago. The volatile multi family (Apartment, Condo and Co-op) sector rose by 31.8% to an annual rate of 102,000. Year over year multi-family starts are up a very strong 104.8%.
The total starts number was well above consensus expectations of a 570,000 annual rate. However, in any absolute sense, the level of housing starts is just plain awful. It is easy to get a nice percentage gain if you start with a low enough base. The extremely weak rate of new home construction is a major drag on the economy. It is the principal reason that this recovery feels so anemic.
The silver cloud is that fewer starts mean that there are fewer houses added to the inventory of houses looking for buyers. We still face an inventory glut, so a weak homebuilding industry is a key part of the repair process for the housing market. The inventory glut is concentrated in the used home segment of the market, and that is also where the "shadow inventory" resides.
New home inventories are actually near historic lows in absolute terms. Used homes are pretty good substitutes for new homes, so that is a bit of a distinction without a difference. Housing Starts peaked in June of 2006 at an annual rate of 2.273 million. We are thus 72.3% off of the peak levels.
The rebound this month will slow the adjustment process, but also means more economic activity over the next few months. On balance I have to see the increase in starts as being a good thing, but if New Home Sales do not pick up, the new homes being built will simply make the inventory situation worse.
It is hard to overstate just how important housing starts are to the economy. Yes, at this point, residential investment has declined to the point where it looks almost insignificant, just 2.21% of GDP in the first quarter, down from 6.34% of GDP at the height of the housing bubble. However, historically, residential investment, of which new home construction is the largest part, has always been the main locomotive in pulling the economy out of recessions.
Take a good hard look at the first graph below (from Calculated Risk) and the relationship between when the lines bottom and the light blue recession bars. If you want to know why this recovery seems so anemic, look no further than this graph. Even the 2001 recession, which was not caused by a housing downturn, saw a sharp acceleration in housing starts as the recession came to an end. Of course, since starts were jumping but were not starting from a depressed level, that boom later became known as the housing bubble that put us in this mess to begin with. Every other recession was preceded by a sharp fall in housing starts; every other recovery saw housing starts lead the way.
This is no coincidence. Each new home built generates a huge amount of economic activity. It puts construction workers back to work, and construction workers have been particularly hard hit in the Great Recession, accounting for over 25% of the total jobs lost, even though they were less than 6% of the total workforce when the recession started. That is just the direct construction jobs, but lower building activity also means fewer jobs in the factories that produce building materials, which are counted as manufacturing jobs. Clearly jobs in mortgage finance are also affected by the housing slowdown. They are not included in that one-out-of-four-jobs-lost figure.
As they and the construction workers go back to work they are also going to have more money to spend, perhaps even go out to eat, thus creating jobs for cooks, waitresses and busboys. Housing starts are not just about profits and jobs at D.R. Horton (DHI) and the other homebuilders, but about jobs and profits at firms as diverse as Plum Creek Timber (PCL), Fortune Brands (FO) and Berkshire Hathaway (BRK.B). Indirectly, it even helps Wal-Mart (WMT).
Why is housing so central, as opposed to other industries? Why does it hold the key to the economy booming or busting? Because it is exquisitely sensitive to interest rates, or at least it was, before the avalanche of houses in foreclosure simply swamped the housing market. Even near record low mortgage interest rates don’t seem to be moving the needle. The simple fact is that during the housing bubble we built far too many homes, and we now have a glut of empty homes around the country. Most estimates put the excess vacancies at between 1.2 to 1.5 million (including rental units).
The next graph (also from Calculated Risk) shows the total (homeowner and rental) vacancy rate over time, relative to housing starts. While it is off its peak, it is still far above normal. In such a situation, it seems economic folly to simply build more houses and add to the glut. But if we don’t build houses, the economy remains stuck in a rut. From a strict "allocation of resources" point of view, we would want to see slow housing starts until the vacancy rate fell back to more normal levels (say under 4.0%). Unfortunately the graph only goes through the end of 2010. However based on other data it looks like the vacancy rate has continued to fall so far this year, particularly in the apartment sector.
Thus, one can argue that in the long term, low housing starts are a good thing, as it means fewer new homes adding to the glut. That, however, is extremely cold comfort to the millions of construction workers who are out of work. It is also going to be very difficult to create a sustained growing economy if home building continues to be a drag.
For the month, all of the four census regions posted increases. For the month, the Northeast was the strongest, with total starts rising 35.1% on the month, and up 28.3% year over year. The year over year title goes to the Midwest, with year over year growth of 45.9%, and up a very solid 25.3% from last month. The West was also strong, with a 25.9% increase from last year, but is the weakest for the month, up 5.4%. The South, which is by far the largest of the four regions, accounting for 46.4% of all starts for the month, was up 10.6% for the month, and up just 2.1% year over year.
The rise in starts is encouraging, and fortunately, it is likely to continue. The best leading indicator of housing starts are Building Permits. There the news was also modestly upbeat, at least from a near term economic growth point of view. (Or worse from a long term repair of the housing market point of view).
For the month, total permits rose 2.5% to an annual rate of 6.29,000 and were up 6.7% year over year. That was above the consensus expectations for a 609,000 rate. May was revised down slightly from a 612,000 rate to 609,000. However, the strength was entirely in the multi family part of the market. Single family permits were up only 0.2% on the month, and down 3.8% year over year. Multi family permits rose 8.2% on the month and are up 40.4% year over year. On the other hand, the permit rate is below the start rate, so we can probably look forward to a bit of a slowdown in starts in July and August.
Regionally, the South was the strongest for the month, with permits up 5.5% on both the month and year over year. The Midwest saw permits rise 5.2% for the month and up 6.3% from a year ago. The West was by far the strongest on a year over year basis, up 20.5%, but it was only up 1.4% from last month. The Northeast, the smallest of the four regions, was the weakest on both counts, with permits down 10.0% from last month and down 8.9% from last year.
There is a certain level of ambiguity about if a rise in starts is good news or bad. We need less supply to help the market clear, but, in the meantime the economy is going to be stuck in limbo, unless we can find another locomotive to help pull us forward. The one we have always relied on in the past is clearly derailed.
Every housing start represents a lot of economic activity, and the effects go far beyond the bottom line of the big home builders. Housing starts are an important part of the job picture, and construction has historically been an important source of relatively high paying jobs for those without a lot of formal education. The conundrum is how to get these people back to work without simply adding to the existing housing glut.
Additional government spending on infrastructure would be the logical solution. After all, we have huge needs to rebuild crumbling infrastructure. Better infrastructure would enhance our long term economic competitiveness. The government would not be competing for resources with the private sector, it would be competing with idleness. With rock bottom interest rates, the cost of financing the infrastructure rebuild would be extremely low.
However, in the current political environment, that is not gong to happen as Congress is more likely to slash existing infrastructure spending rather than increase it. This is following the economic theory that putting an incremental $100,000 into the after tax income of a mid level Wall Street investment banker will instill more confidence in the economy that they will produce more jobs, than putting an unemployed construction worker back to work fixing our bridges so they don’t collapse on us. I don’t think that is the case, and that employing the unemployed would be a better route to regaining confidence.
Eventually, the combination of a rising population and higher household formation will absorb the excess inventory, and we will be able to once again increase housing construction. Household formation is economist-speak for kids moving out of their parents houses and getting a place of their own. To do so takes a job, and one that pays enough to support having your own place. In the past, residential construction itself provided a lot of those jobs. That produced an upward spiral. This time around, the jobs have to be created in other parts of the economy to increase the household formation rate, and absorb the excess inventory, which makes the process slower.
This process should probably hit the rental market first, and we are starting to see that. Most of the decline in the vacancy rate shown above has come from the rental side of the housing market. After all, kids moving out of Mom’s basement are more likely to first move into a rental apartment than to buy a house. The decline in the rental vacancy rate is thus a positive omen for the future. However, the unemployment rate for those 20 to 24 years old, the prime age for moving out on your own, was at 14.5% in June. That is going to be a slow process. The unemployment rate for those 25 to 34 years old is also higher than that for the country as a whole at 9.6%. That is the prime age for buying your first house.
The day will come when housing is once again a big positive contributor to economic growth. It is not really sustainable over the long term to have total housing starts running at substantially lower levels than we saw in the 1960s. Back then the population of the country was around 200 million, now it is north of 310 million.
That day however, is not today, or in the near future. It is possible that it might happen in the second half of 2011, but more likely in 2012. For the time being, the best we can really hope for is that it stops being a brake on the economy. That appears to be happening.
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