What May's Housing Starts Say About the U.S. Economy

by: Markos Kaminis

In our weekly copy, we warned that Housing Starts should prove critical when reported for May. Well, the data was lousy when reported this morning, so tread carefully today. Specifically, we said: "May's data should expose the impact of the expiration of tax credits in April." What we are clearly seeing is a crippled economy in the absence of government stimuli.

Housing Starts sank 10% to an annual pace of 593K, down from April's revised pace of 659K. Single-family starts collapsed even further, dropping 17.2% to a rate of 468K. Some will argue that starts were pulled into March and April from May and June due to the tax credit, but that only places the real annual pace somewhere in between, which is not a satisfactory pace of activity either.

Rather, we think you need to digest the fact that there will be no robust economic recovery given anchored unemployment and the burdens this economy carries from the worst financial disintegration since the Depression. Economists were somehow surprised by this data (tell me how they could be considering they get paid for forecasting), as the consensus had forecast a pace of 650,000 (that's a big miss).

Building Permits also depressed us, as the annual pace fell to 574K in May, down from April's 610K. Housing completions fell to 687K, down from 742K in April. Regionally speaking, the trouble was worst in the South (-21.3%) and Northeast (-6.3%); Starts in the West gained by 10.8% and in the Midwest by 4.9%. However, before you Midwesterners get too excited, note that your permitting activity was the worst of all in May.

Mortgage Activity Report

Acting to temper the impact of the Housing Starts data, the latest Mortgage Activity Report from the Mortgage Bankers Association showed the first growth in over a month. However, recall our insight from last week at the blog, within which we exposed a very clear miscalculation of the impact of the Memorial Day holiday. We said the drastic change clearly showed the adjustment for the holiday was inadequate, and so this week's improvement should not temper concerns raised by the Housing Starts data. Instead, look ahead to next week to try to get a handle on real activity.

For the week ended June 11, the Market Composite Index of mortgage volume recovered 17.7%. Refinancing activity certainly played a role, as the Refinance Index jumped 21.1%. Contracted fixed rates on 30-year and 15-year mortgages averaged 4.82% (from 4.81%) and 4.23% (from 4.26%), respectively. Purchase Activity gained as well last week, as the Purchase Index improved 7.3%. We do not expect most market participants to fully understand (or even know of) the Memorial Day adjustment impact (lowered the prior week significantly), and so this report is temporarily acting to mitigate the market impact of the horrible housing data. Eventually, smart money will figure it out, and stocks should seriously begin considering housing stagnation and double-dip recession.

Disclosure: No Positions