A little deflation and some tepid news on new home construction constitute the economic news of the day.
Producer Prices slipped 0.9% after 3 months of increases. The core rate, ex food and energy, was down 0.1%.
The decline was spread pretty uniformly across all sectors suggesting that demand remains weak. Excess capacity will keep a lid on prices for the foreseeable future.
New Housing Starts
Housing starts were down 1% due to weakness in multifamily. Single family starts increased 1.7% while multifamily starts fell 13%. Building permits were up 5.8%. Keep in mind that these are very volatile numbers subject to significant revisions.
Nevertheless, the trend has been steadily up since Spring, so it’s not unreasonable to conclude that the bottom has been reached. Part of the increase in single family starts has been driven by the $8000 tax credit which expires in November. Buyer activity has been buoyed by the tax credit and some builders may have some modest spec building in their inventory as a result of anticipated sales due to the credit.
Whether the climb out of this bottom is robust remains to be seen. Headwinds including unemployment and a formidable inventory of foreclosed homes will probably mute it for some time.
Here are economists’ reactions to the housing numbers from the WSJ Real Time Economics Blog:
- The surprise drop is entirely due to a correction in the very volatile multi-family homes segment where starts and permits both registered double-digit declines, rather than the start of another lurch downward in activity. Indeed, excluding the multi-family homes, the numbers looked very good. 1-family starts and permits both hit a 9-month high. The pickup is in line with the recent strengthening of the homebuilders’ confidence indicators which hit a 14-month high in Aug ’09. In the view of the builders enough has been done to address the supply overhang. New home supply is, indeed, at the lowest in over 10 years, while sales appear in the process of picking up. –ING
- Housing Starts are up from their lows at the start of 2009, but gains are tepid. Once again, multi-family starts are falling sharply as single-family starts are up. The weakness in the multifamily side could be reflecting restrained financing. Another factor to consider is that the increased availability of rentals could be slowing demand for multi-family projects. –Stephen Gallagher, Societe Generale
- Multi-family housing units, whose target market is most commonly found at the extreme ends (very young and retirees) of age-profile of households, is likely to be more vulnerable than single-family housing to the tighter lending standards so builders are less likely to risk new projects in this segment of the housing market. The improvement in single-family starts, however, looks likely to continue but is not likely to follow the abrupt V-shape of previous housing recoveries. Instead, a moderate uptrend is most likely to continue until the overall economy shows more consistent progress out of the recession. –Nomura Global Economics
- This report could be interpreted in two ways. On the optimistic side, it appears that residential construction activity may have stabilized to a degree insofar as the volume of single-family starts is now the highest level since October 2008 combined with the fact that even after the healthy 6.5% month-to-month gain in June starts only gave back a slight margin. On the other hand, with sales continuing to lag behind the level of building activity by a factor close to 200,000 (latest data puts the gap at 197,000), even though the level of starts declined on the month it does suggest that the inventory of unsold homes could potentially rise higher. At the end of the day, the U.S. housing market seems to be starting to improve though there is much work ahead to alleviate the current problems in that market. –Ian Pollick, TD Securities
- The inventory picture, while improved, still remains problematic. At the end of June, the number of existing homes in inventory was 3.823 million while the stock of new homes for sale was 281,000. While the number of new homes in inventory has collapsed from its high of over 570,000 and is now more or less near what may be a bottom, the number of existing homes for sale remains about 1.4 million or so above “normal.” –Dan Greenhaus, Miller Tabak
- Single-family starts are up by 37% since bottoming in February, but part of the reason for the rebound reflects an attempt by builders to take advantage of the federal homebuyer’s tax credit before it expires later this year. A new homebuyer must close on his home by November 30 in order to claim the credit, so builders ramped up groundbreaking activity in late spring in order to finish new homes by the fall. Thus, some construction activity is likely being pulled forward into the summer months, and it remains to be seen whether homebuilding can maintain its current pace in the coming months. Builders may be heartened by the fact that inventories of new homes for sale in June stood at their lowest level since 1993. Still, there is stiff competition from existing homes and foreclosures. Moreover, builders trying to take advantage of the tax credit by starting new homes are building partly on spec, so they may be left with additional unsold inventory in the winter if housing demand eases at all. Thus, while it seems that groundbreaking activity has stabilized following the free-fall seen post-Lehman, the coming months may lead to some weakness as the impact of the tax credit fades. –Omair Sharif, RBS
- A seven month upward trend is not something we should dismiss. Of course, we are still at levels not seen in the past fifty years, so there is still a long way to go. Over the year, single-family starts are off 22.5%, which seems large but really is not that bad especially when you compare it to multi-family construction. That segment is down 70%. With all the inventory in the condo market, it is not surprising that we are not putting up lots of new buildings. Looking forward, we should expect to see further increases in single-family construction as permit requests rose to its highest level since last October –Naroff Economic Advisors
- We view this report (and yesterday’s NAHB survey) as further evidence that single-family housing activity has stabilized and is beginning to turn up from very low levels. The drag on GDP growth from residential construction is likely to fall sharply in the third quarter and, by the fourth quarter, residential construction could add slightly to overall economic growth. –RDQ Economics
- This has in all likelihood been a rebound from unsustainably weak results rather than the start of anything resembling a sustained “v-shaped” recovery. (Indeed, this is a pattern traced by many economic indicators as the panic and paralysis phase of the slump ended.) Gains from here on will probably be much more difficult to achieve, as poor labor market conditions, extremely tight credit, overly leveraged household balance sheets, and declining home prices all exert downside pressures. –Joshua Shapiro, MFR Inc.
- While starts have moved off of their cyclical bottom, we see limited upside potential over the months ahead. In the single family segment, continued weakness in the labor market and what will remain a steady stream of foreclosures will keep downward pressure on house prices and ensure that builders — in an increasingly broad geographic range of markets — see steady competition from low-priced foreclosures. While the number of single family units being started that are intended for sale is running below the pace of new home sales, completions of units intended for sale are only now coming into alignment with new home sales. This is, in and of itself, quite an accomplishment given how badly out of alignment sales and completions of for-sale units had become in the aftermath of the collapse in sales. Still, while there has been material progress made in clearing inventories of new homes for sale, there is little margin for error and builders are likely to remain relatively cautious, at least over the near term. –Richard F. Moody, Forward Capital