October Housing Starts: Is There Finally Light at the End of the Tunnel?

by: James Picerno

It's been a while since there's been good news for housing, which makes this morning's update on October's housing starts especially welcome.

Privately owned housing starts in October rose 3% percent above the revised September estimate, the Census Bureau reported today (pdf). The increase, which is the first after three straight months of declines, was the biggest gain since February. As an added treat, the advance in housing starts were comfortably above the consensus forecast, according to TheStreet.com. In addition, the government revised September's starts up a notch.

Alas, the housing correction (or should we say recession?) isn't over. It'll take more than one month in one data series to reverse the battered state of affairs that continues to roil the sector. Indeed, if we look at year-over-year trends, last month's housing starts are more than 16% below the levels from October 2006.

In fact, the more we look at today's housing report, the more the modest rise in October starts look like an anomaly. For example, although starts generally increased last month, a closer look reveals continued weakness within single-family housing starts, which dropped 7.3% in October vs. September. In other words, most of the gain in overall starts last month was due to multi-family housing. Condos are keeping hope alive in the construction of new housing.

Meanwhile, building permits, which are considered a gauge of future construction activity for housing, fell again last month by 6.6% from September's level. Permits are now at the lowest levels since 1993.

"We have not hit a bottom [in housing]," Keith Hembre, chief economist at FAF Advisors in Minneapolis, told Reuters. "We need to see starts fall to a one-million unit rate, or roughly a 20 percent drop from current levels, before building activities stabilize. And we need to see that rate for about one to two years."

Another dismal scientist also prescribed caution in the wake of this morning's housing report. "All of us are ratcheting down our expectations for the bottom of the housing sector and I don't think we're there yet,'' David Resler, chief economist at Nomura Securities in New York, told Bloomberg News today.

Indeed, single-family housing starts aren't likely to recover to any great degree in the coming months for the simple reason that the inventory of single-family homes for sale remains hefty. That means that house prices are likely to remain under pressure for the near term. Home builders know that and so do potential home buyers.

Waiting, in other words, still looks like the preferred strategy when it comes to housing. At the same time, there's the glimmer of light at the end of the tunnel. It's a dim beam and it may yet flicker out again. But maybe, just maybe, a bottom awaits in '08.