September Housing Starts and Permits Disappoint

By Dirk van Dijk

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 Calculated Risk) 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 in better sewers and wastewater 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.

Comments

[Mad Hedge F...:]

pst Since I have been pelted daily with predictions that residential real estate has bottomed for the last two years, like hail in a Midwestern summer thun derstorm, I feel a public duty to tell you that is just not the case. Now that the state and federal moratoriums are off, foreclosures are accelerating. There are over a million Option ARM and Alt-A loan resets about to hit the fan. Since many owners will not see positive equity in their homes in their lifetimes, banks are seeing more walk aways and keys mailed in, often with tearful letters attached. The run up in mortgage rates from 4.5% to 5.5% has yet to hit the market. Some 18 million homeowners divert 50% of their incomes to pay for housing, double the 25% that is considered healthy, and many of them are losing jobs at a record rate. While the volume of units sold has rebounded, the action is dominated by speculators, flippers, and bottom feeders bidding for properties at 10-40 cents on the dollar, not exactly a sign of health. I like to visit the plethora of open houses in my neighborhood, but always find the dead broker hanging from the showerhead a bit of a downer for a Sunday afternoon. Call me when Ozzie & Harriet Nelson come back to the market. I listened to industry insiders call the bottom of the Japanese real estate market for 15 years, until they finally died, and the market is still a fraction of its 1990 high. I think we are closer to the bottom than the top in terms of price, but closer to the top than the bottom in terms of time. You can take that to the bank.

Oct 20 11:13 AM

[doubleguns:]

Housing is down because the govt money is getting ready to end. They may extend it but where is that money going to come from . The presses. The only thing working in this economy is the areas that the govt has funded.

When the govt money runs out or the presses break down, the economy will grind back to a halt.

Oct 20 12:42 PM

[a fat panda:]

The sum of the government's intervention has slowed the rate at which the bubble is contracting. It hasn't changed the ultimate contraction. We will have that, it is just going to take a longer. Slow housing starts is part of the the cure.

As noted above, rising mortgage rates, foreclosures, rising unemployment and existing inventory are forcing prices lower. Another factor is rising inventory that will be coming online. In addition to the bank foreclosures, the rental market is full of homes that to the rental market because the housing market was so weak. These are unwilling landlords are just waiting to put this inventory back into the market. Another factor will be boomers looking to downsize from their large homes. So the sales channels will be full for sometime.

Oct 20 01:08 PM

[Doc 224899:]

It's a simple solution: establish rational, objective criteria, based on sound reasoning and relevant facts that are verifiable, that banks can apply to all applicants in the same way in order to determine who is a good risk for a mortgage and how much they are likely to be able to afford on a monthly basis for the next 15 or 30 years.

This will fix the credit crisis, the real estate crisis, the financial crisis, and the national economic crisis, because they all stem from a failure to apply such criteria to applicants for home mortgages.

Regions of the country with the worst stats are regions where the sad consequences of failing to apply such simple, objective criteria have been the most severe because the greatest number of people in those regions were given mortgages that shouldn't have been given mortgages in the first place.

Any other discussion, before the issue of objective lending criteria is addressed, is nothing more than distracting clutter and rubbish.

If we don't do this, and if we bail out people with foreclosures who shouldn't have been given mortgages in the first place, those people will fail again and we'll be flushing our national wealth down the drain.

Oct 20 02:49 PM

[Alan Young:]

The analysts who expected a boom in housing starts must be living in some kind of bubble world. Much of the country is blighted with vacant housing, old and new; banks are waiting to put foreclosed houses on the market, even waiting foreclose on delinquent owners, because the market is glutted with overstock that buyers still can't afford.

Zack's is exactly right that we should focus on building infrastructure, not houses. Who needs a house that relies on leaky water mains, an inadequate power grid, poor roads and/or public transit that is in shambles?

Oct 20 10:25 PM

[Living4Divi...:]

The printing presses are electronic and since redundant fault-tolerant computers are used, they will never break down.

Their is no limit to the amount of money that the govt can electronically print. The only thing that will stop the presses is a surge in inflation and angry electorate.


On Oct 20 12:42 PM doubleguns wrote:

> Housing is down because the govt money is getting ready to end. They
> may extend it but where is that money going to come from . The presses.
> The only thing working in this economy is the areas that the govt
> has funded.
>
> When the govt money runs out or the presses break down, the economy
> will grind back to a halt.

Oct 21 09:49 AM

[Living4Divi...:]

Housing prices have been declining and their is clearly and excess supply of existing homes.

Clearly, the smartest thing to do is to STOP building new homes, until demand catches up with supply.

Unfortunately, this is not happening. The Fed Govt continues to support new housing starts., through the FHA and oddly enough USDA (yes, US Dept of Agriculture), This makes no sense.

I say the Government recognize that the nation doesn't need to build any more new homes until demand catches up with supply. Remove all Govt subsidies (FHA and USDA cheap loans) to home builders. If someone wants to buy a NEW home, they will have to obtain their own private financing.

There should be no housing starts that are due to "cheap govt money."

The Govt should still maintain their subsidies for existing homes.

This policy will encourage the purchase of existing homes.


On Oct 20 10:25 PM Alan Young wrote:

> Much of the country is blighted with
> vacant housing, old and new; banks are waiting to put foreclosed
> houses on the market, even waiting foreclose on delinquent owners,
> because the market is glutted with overstock that buyers still can't
> afford.
>

Oct 21 09:52 AM