Housing Starts Disappoint But Permits Wear Rose Colored Glasses

by: Bondsquawk, CFA

by Rom Badilla, CFA

The housing market continues to show signs of strength as construction on residential housing picks up which could provide fuel for economic growth. Today, U.S. Housing Starts increased 2.3% in August to an annualized rate of 750,000 homes. This follows a revision to the previous month's data, originally reported to show a decline of 1.1%, of a bigger fall of 2.8% or an annualized rate of 733,000 dwellings. The August increase disappointed as the market was expecting a rise to 767,000 homes as evident by the median forecast of economists.

Housing Starts

Behind the headline number, housing starts in Single-Family homes was the main reason for the August increase. Single-Family Homes rebounded from the July decline of 4.5% by surging 5.5% to an annualized rate of 535,000 dwellings. Multi-family housing starts provided the offset by falling 4.9% from a 1.3% gain in July.

Despite the disappointment in Housing Starts, other reports out of the U.S. Commerce Department suggest better activity in the months ahead. Building permits which is a leading indicator of the aforementioned Housing Starts came in at 803,000. This follows the revised prior period reading of 811,000 homes which is the highest in four years. Housing Permits have been rising since the third quarter of last year where figures reached 698,000 homes. In addition, the July and August data show the first back to back prints above 800,000 since the summer of 2008.

Housing Permits

As in the case with the components of Housing Starts, it appears that the trend toward more single family dwellings will continue. Housing Permits for Single-Family homes increased marginally by 0.2% while permits for Multi-Family dwellings fell by 3.0% in August.

The fall in multi-family housing starts may be a reflection of the recent trend of increasing rents is starting to weigh on demand for apartments. After the housing crash, individuals shifted away from homeownership to the mobility and flexibility of renting. Given today's data, that sentiment may be shifting again and back toward buying a home.

Housing looks to have bottomed and coupled with Tuesday's high in the National Association Home Builders Market index, may make some meaningful gains in the coming months. Supplemented by the Fed's war against unemployment via lowering mortgage borrowing costs to historical lows, housing may pick up even more. The question remains if credit conditions allow for the formation of new loans.

The focus should be on banks as financial intermediaries continue to fight through the new regulatory environment of mortgage origination and securitization which is the key to easier credit to Main Street. Time will tell of course, but if history is a gauge where banks are reluctant to extend loans due to the risks, then the growth in housing will be near trend and nothing like the surge seen during the housing boom. In any event, positive gains in housing is one of the bright spots and should continue to do so going forward.