Housing Relates To Income More Than Credit Now

 |  Includes: ITB, PKB, XHB
by: Alhambra Investment Partners

By Jeffrey P. Snider

"High frequency data", as some of these data series are known, causes an inordinate problem for those that are unwilling to move outside of monthly changes. These are the kinds of accounts that are "noisy" and can be difficult to handle absent any real context, but that does not stop them for being used persistently to pigeonhole a viewpoint. Last month's dismal housing construction data was "odd" and "unexpected" while the much better figures this month are "confirming" and "point to a positive trend." What a difference a month makes.

That is a huge problem because the month-to-month volatility tells us very little about the state of affairs. In housing construction, that is even more the case as it is far "noisier" than most.

The end result is as it has been since early 2013. The pace of construction has slowed down to a significant degree; we just don't have a clear idea of that trend's terminus given these jagged edges. Even in the smoothed areas of seasonally-adjusted annual rates (SAARs are sometimes dangerous on their own) there is a clear flattening to what was a stable-looking upward ascent. The Census Bureau itself advises using moving averages of varying lengths in the SAARs to gain more relevant perspective:

Even in the smoothing there remains significant gyration. The problem is not so much the housing market's instability, but more so the absolute lack of realizable pattern in apartment construction. So where June was such a disappointment on the pace of multi-family (in the South, mostly), it was the opposite in July without any apparent rhyme or reason.

Even in that tangled mess above of data in all directions, there is at least some recognition that permit activity (and starts to a degree) are nothing like what we saw during the mini-bubble period going back to 2011. That means some deceleration, but again it is difficult to extract anything like a precise estimate.

That leaves, of course, single family construction as rather lackluster and ultimately depressing given expectations for this formerly primary monetary policy channel.

While permits and starts are positive in terms of yearly comparisons, that isn't necessarily statistically significant nor potentially meaningful. As the chart above shows, even the positive numbers are well within what looks like a durable trend and nothing like the rate of expansion (and activity) that came in 2011 and 2012. Only reduced standards would see something encouraging and reinforcing of the recovery here.

In regard to the "disappointing" June downshift, USA Today noticed this problem as well.

For the first half of this year, housing starts are up 6% from a year ago, but much of the growth has been in apartment buildings as builders chase a growing market of renters. Construction starts for larger multi-family unit housing are up about 18% in the first half, but ground-breakings for single-family homes are up only 1.2%.

In July, "somehow" the same theme persists despite such "better" numbers seemingly across the board. Context matters and credit is due to USA Today for actually printing it and being consistent (a rarity):

Despite the improved numbers, however, the pace of building in the single-family home sector remains a concern, said economist Richard Moody, of Regions Financial. Permits average only 613,000 a month over six months - a low rate indicating the pace of single-family home building will not match even July's rate in coming months, let alone accelerate, he said in a research note Tuesday…

While housing starts are running ahead of last year, much of the growth has been in construction of apartment buildings, rather than single-family homes. Through July, housing starts overall this year are up about 9% from last year's first seven months but construction of single-family homes is only up about 3%.

Despite that sore spot, most credentialed economists are and remain optimistic because,

…said IHS Global Insight economists Patrick Newport and Stephanie Karol in emailed comments after the Census report. "As job and income growth continue to recover, the single-family market should benefit."

That might be a problem because other credentialed economists, including some orthodoxists at the Fed like Janet Yellen, are beginning to notice that job growth (at least as presented by the Establishment Survey) is not quite producing income as expected. In fact, the lack of income growth is downright puzzling in historical context, which is what orthodox economists keep expecting despite six years of everything else (on the downside).

Meager improvements since 2009 have barely kept up with a similarly tepid pace of inflation, raising the real value of compensation per hour by only 0.5%. That marks the weakest growth since World War II, with increases averaging 9.2% at a similar point in past expansions, according to Bureau of Labor Statistics data compiled by Bloomberg…

Stagnant earnings also explain an economy that's having trouble sustaining a rebound in housing and consumer spending, according to David Blanchflower, a professor of economics at Dartmouth College in Hanover, New Hampshire.

In other words, the economy is, for "some" reason, not acting like an economy. These figures demand reconciliation with true wealth, which is where wages actually come from, instead the conversation will remain in the paper domain of credit, credit and more credit. Job "expansion", such that it may actually exist, has been limited to servicing those with direct access to inflation, mostly of the asset variety. That is not a basis upon which a construction boom will be laid.