Huge Jump in Housing Starts Does Not Point to Solid Recovery

Lee Coursey

Home Construction

How could anyone take pot shots at a nearly 15 percent monthly jump in anything, not to mention housing starts, which have been mired in the mud for ages now?

Apparently pretty easily.

I knew the moment I saw the number that there would be those arguing that any gain in new home construction is a negative because of the already bloated inventory of new, existing and foreclosed properties on the market.

Miller Tabak's Peter Boockvar provided that: "Bottom line, I repeat again that we don't need an increase in single family housing starts with a 9.3 month inventory to sales ratio of existing homes, but hopefully the pace of permits will prove the June jump as being an outlier (admittedly, the pace is still extremely depressed). Multi-family is where the housing construction benefits are being seen, and that will be the case for years to come."

While single family starts were up over 9 percent, it was multi-family driving the train in this report, up nearly 32% month-to-month. We all saw that coming, as rental demand has been surging, and there is not near enough supply in the pipeline. Patrick Newport of IHS Global Insight sees today's report as highly predictive of housing's slow slog back.

"The shape of the housing recovery is starting to form. It will be one in which the multi-family market recovers before the single-family home market does. Indeed, the stars are starting to align for the multi-family segment. Rents are rising, as are the prices of rental properties, rental vacancy rates are falling, job growth is up (although it has shifted into low gear) and homeownership rates are falling. For the single-family market, the near term outlook is for more of the same. For this segment to get back on track, two things must happen. The economy must continue creating jobs, and housing prices must bottom out."

But single family starts were up over 9 percent, which isn't exactly chump change, or is it? Paul Dales of Capital Economics blames the weather:

"The 14.6 percent m/m leap in housing starts in June, to a five-month high of 629,000 from 549,000 in May, is not the start of a significant and sustained surge in homebuilding. Instead, it reflects a rebound in activity after the unusually severe tornadoes and floods depressed starts in both April and May."

Others cite the weather as well, which affects starts far more than permits, and single family permits were basically flat at the 13th lowest reading on record. And then there are those who look at completions, like JT Smith of Aristar, who notes, "Completions are very disturbing, down 39 percent or 350k units year over year…this doesn’t translate well into forward looking starts."

I realize that many of you will argue that I am throwing cold water on housing market that is finally heating up. Sorry, I calls 'em as I sees 'em. Housing starts are so historically depressed right now that even a 15 percent jump doesn't signal the "all good" to me, at least not when we all know that there is a huge inventory of distressed properties that haven't even hit the market yet. Just ask the builders themselves…they know the number 15 pretty well…that's where they currently register on the National Association of Home Builders sentiment index, 15. 50 is the line between positive and negative.

Questions? Comments? [e-mail] follow me on Twitter @Diana_Olick