Starts Are Not What They Seem

Housing Starts
Housing Starts

A surprising housing starts number sent the markets churning and the analysts buzzing, and when it all shook out the takeaway was less than promising. Housing starts bumped up 22% in February from the month before, but broken down, you see that single family starts rose just 1% while multi-family shot up 82%.

How could all this be?

Nishu Sood of Deutsche Bank:

I chalk it up to how low the number had fallen (making the subsequent jump look bigger in percentage terms). Multifamily starts had truly fallen off a cliff in 2H08, so the natural volatility in the series is amplied in percentage terms. Even after this month's jump we are still well below the averages of 2007 and 1H08.

And then of course there was the weather factor: a very cold and wet December and January were followed by a much milder February, so all those homes that didn’t get started in Dec/Jan, hit the dirt in Feb. If you look regionally, the starts were strongest in the Northeast, again where the weather was unseasonably mild in February.

More important to look at is the permits number. Single family permits rose 11 percent nationwide, although regionally they were down nearly 14 percent in the West. John Burns of John Burns Real Estate Consulting in Irvine, CA surveys thousands of builders, and he says “not one of them is planning on building any more homes in 2009 than they did in 2008, so you can count on the trend being lower.” He says nobody is building anything out West and adds, “None of them have bought any land to start new communities, so there’s no new communities being opened either.”

So why are permits up? Well, says building analyst Ivy Zelman, "This is supply. It is not indicative of demand.” She notes that builders, and the banks funding them, have money in the ground already, in finished lots. “You have to put a house on it. Vertical construction continues even though demand is not strong.” If you don’t put a house on it, the land is a total loss. If you put a small, cheap house on it, maybe you can recoup at least the cost.

But the permits number is not good news to J.P. Morgan analyst Michael Rehaut:

We believe a rise in new home inventory would only exacerbate the current downturn. Moreover, we believe these elevated inventory levels will continue given our outlook for weak demand to continue well into 2009, driven by rising unemployment, low consumer confidence, still tight credit conditions, and rising delinquency and foreclosure rates. Accordingly, we reiterate our negative sector stance on both the builders and the building products.

I understand that a lot of folks would like to see today’s numbers as some sign of a bottom in housing. I do think there are signs of movement, especially out West where huge price drops and distressed properties are sparking sales. But I don’t think those sales can be seen as a bottom in housing. Until we get to a point where housing is no longer a drag on the economy, and I don’t mean it has to add to the economy, just not subtract from it, we can’t responsibly say that the housing crisis is over.

Foreclosure mitigation has really just begun, and consumer confidence, especially in housing, is still a far cry from normal.

Questions? Comments?