The popular press, radio and television media celebrated the “strong housing starts” reported for November Tuesday. The shares of homebuilders had a good time too, with the SPDR S&P Homebuilders (XHB) up 5.3%. However, I suspect homebuilder enthusiasm will prove fleeting. After a look at the report, I say bah humbug! That’s because while housing starts ran at a higher rate, they occurred in a specific segment of the market that I suggest offers few good tidings for the real estate market. It’s a great sign for the likes of Mr. Potter, from It’s a Wonderful Life though.
Housing Starts rose a strong 9.3% over October’s revised rate and an astounding 24.3% over last year’s sad affair. Building Permits ran at a 5.7% higher rate than in October and posted an impressive 20.7% increase over the prior year period. Yet, Starts at an annual rate of 685K and Permits at a rate of 681K were far less impressive after closer inspection of the data.
The reason for my lack of enthusiasm should be obvious, but is clearly not to an undiscerning majority, nor to investors in Hovnanian (HOV), PulteGroup (PHM) or Beazer Homes (BZH), who all enjoyed double-digit gains Tuesday. You see, most of the activity occurred in multi-family housing, not in single-family homes. Single-Family Housing Starts only increased 2.3% over October’s rate, to 447K, and Single-Family Home Permits only rose by 1.6% over October’s rate, to 435K.
Multi-family projects could be intended to house renters. A housing start measures the start of construction of a project intended for residential use. The properties do not necessarily need to be presold. Therefore, the 32.2% increase in structures intended to house five or more family units may very likely be for a Pottersville-like purpose, to house the “suckers in Potter’s slums,” from the famed and seasonally appropriate film. We should not be surprised, given today’s higher credit standards, increased levels of unemployment and underemployment, and a population less likely to attain home ownership. This is not something to celebrate, though, not in my view.
Single-family starts were on the rise in the Northeast and the West though, increasing 35.7% and 10.7%, respectively. Single-family starts in the Midwest and the South fell 14.5% and 1.3%, respectively. Multi-family projects were on the sharp rise in both the Northeast and West as well, though, so there appears to perhaps be a housing shortage being filled. It makes sense that distressed property inventory would first be absorbed by the population dense Northeast and West. Generally speaking, this is a development that should be expected, given the length of the period with little construction and the continued growth and maturation of the population. However, it’s too early, and the data is too limited to make such a call.
Besides, with our economic view, and the related stumbling block we see for housing over the near-term, any green shoot that may sprout should be quickly dried out. In conclusion, I’ll hold my excitement for when single-family starts initiate a rising trend, and more importantly, when economic healing drives increased general demand for housing.