Housing Is Back, Yet Again

 |  Includes: ITB, IYR, XHB
by: Dean Baker

The Post has another piece showing some premature optimism on the housing market. The proximate cause was the jump in housing starts that the Commerce Department reported for last month. As the piece notes, this jump was driven almost entirely by an increase in starts reported for multi-family units. In fact, most of the gain was attributable to sharp rises in starts in the Northeast and West. The gains in the South were modest and starts in the Midwest actually fell.

In fact, housing starts, especially for multi-family units and near the end of the year, are highly erratic. For example, mulit-family starts jumped 92.8 percent in January of this year. These erratic movements are often related to tax or regulatory changes that can make it desirable to rush ahead with a project before the end of the year or to delay it into the next year. This is why it is desirable to see several months data before assuming that the reported change is real.

The other items cited as evidence of a recovering housing market are also dubious. The piece asserts that house prices have stabilized. Actually, the Case-Shiller 20-City index shows prices falling since April. The piece reports a rise in rents, but this is largely due to the impact of higher utility prices. The owner equivalent rent index, which excludes utilities, has increased at just a 1.9 percent annual rate over the last 3 months and a 2.1 percent rate over the last six months. The latter is almost identical to the overall rate of inflation over this period.

The piece also argues that shortages of housing are starting to appear because the 1.2 million trend annual rate of household formation is wearing away at the excess supply created by the building boom of the bubble years. Actually, the trend rate is almost certainly well below1.2 million given the country's current demographics. The Congressional Budget Office projects labor force growth at around 1 million a year. This would put us at a considerably slower rate of household growth even if every new worker started their own household. In terms of the underlying balance of supply and demand, the Commerce Department shows that vacancy rates are still at a near record high.

(Note: some have raising doubts about the vacancy data. These calculations failed to note that when dilapidated housing is put back into use or non-residential property is converted to residential use, these units do not appear in the housing start data.)