Housing Starts fell in December to a seasonally adjusted annual rate of just 529,000 from 553,000 in November, a fall of 4.3%. The November numbers were revised slightly lower from 555,000, so it is possible to see the decline as 26,000. Relative to a year ago they are down 8.2%. Quite frankly, a year ago was a pretty lousy time for the home builders as well.
If one looks at only single-family houses, the decline was even worse -- falling to 417,000 from 458,000 in November, a drop of 9.0%. The volatile multi-family (Condo and Co-op) sector, rose 25.9% to an annual rate of 102,000. Year-over-year single-family starts are down 14.2%, and multi-family starts are up 30.8%.
The total starts number was below consensus expectations of a 550,000 annual rate. The extremely weak rate of new home construction is a major drag on the economy. It is the principal reason that this recovery feels so anemic.
The silver cloud is that fewer starts means that there are fewer houses added to the inventory of houses looking for buyers. We still face an inventory glut, so a weak homebuilding industry is a key part of the repair process for the housing market. Housing Starts peaked in June of 2006 at an annual rate of 2.273 million. We are thus still 76.7% off of the peak levels.
It is hard to overstate just how important housing starts are to the economy. Yes, at this point, residential investment has declined to the point where it looks almost insignificant -- just 2.22% of GDP in the third quarter, down from 6.34% of GDP at the height of the housing bubble. However, historically, residential investment -- of which new home construction is the largest part -- has always been the main locomotive in pulling the economy out of recessions.
Take a good hard look at the first graph below (from http://www.calculatedriskblog.com/) and the relationship between when the lines bottom and the light blue recession bars. If you want to know why this recovery seems so anemic, look no further than this graph. Even the 2001 recession, which was not caused by a housing downturn, saw a sharp acceleration in housing starts as the recession came to an end.
Of course, since starts were jumping but were not starting from a depressed level, that boom later became known as the housing bubble that put us in this mess to begin with. Every other recession was preceded by a sharp fall in housing starts.
This is no coincidence. Each new home built generates a huge amount of economic activity. It put construction workers back to work, and construction workers have been particularly hard hit in the Great Recession, accounting for over 25% of the total jobs lost, even thought they were less than 6% of the total workforce when the recession started.
The effects go much further than just the profitability of D.R. Horton (DHI). Each new home requires a lot of lumber from a firm like Plum Creek Timber (PCL), roofing and insulation materials from Johns Manville (part of Berkshire Hathaway, BRK.B) and wallboard from USG (USG).
This list goes on and on, but it also means jobs for the lumberjacks and factory workers in those plants. They are not included in that "one out of four jobs lost" figure. As they and the construction workers go back to work they are also going to have more money to spend -- perhaps even go out to eat at Bob Evans (BOBE) -- thus creating jobs for cooks, waitresses and busboys.
Housing Central to Economy
Why is housing so central, as opposed to other industries? Why does it hold the key to the economy booming or busting? Because it is exquisitely sensitive to interest rates -- or at least it was before the avalanche of houses in foreclosure simply swamped the housing market. Even record-low mortgage interest rates don't seem to be moving the needle.
The simple fact is that during the housing bubble we built far too many homes, and we now have a glut of empty homes around the country. Most estimates put the excess vacancies at between 1.5 to 2 million (including rental units).
The second graph (also from http://www.calculatedriskblog.com/) shows the homeowner vacancy rate over time. While it is off its peak, it is still far above normal. In such a situation, it seems economic folly to simply build more houses and add to the glut. But if we don't build houses, the economy remains stuck in a rut. From a strict “allocation of resources” point of view, we would want to see slow housing starts until the vacancy rate fell back to more normal levels.
Thus, one can argue that in the long term falling housing starts is a good thing, as it means fewer new homes adding to the glut. That, however, is extremely cold comfort to the millions of construction workers who are out of work. It is also going to be very difficult to create a sustained growing economy if home building continues to be a drag.
If residential investment (of which new home construction is the largest part) had simply remained at the depressed levels of the second quarter, rather than declining further, the economy would have grown at a 3.25% rate in the third quarter rather than at just 2.50%.
The current numbers seem to indicate that residential investment will not be a drag in the fourth quarter, and might actually be a slight contributor. Just not acting like a brake will allow significant acceleration in economic growth in the fourth quarter.
Results by Region
Regionally, the housing starts numbers were all over the lot. On a month-to-month basis, the West was the strongest by far, with total starts rising 45.8% on the month, and up 28.4% year over year. The Midwest was the weakest for the month, with a 38.4% decline, and down 26.6% year over year. The South, which is by far the largest of the four regions, accounting for 49.5% of all starts, was down 2.2% on the month and is down 16.0% from a year ago. The Northeast, the smallest region, was down 24.7% on the month and off 4.9% year over year.
While the numbers are seasonally adjusted, the weather in the Northeast and Midwest was worse than normal in December, and that might have played a role in the month's weakness.
Building Permits
While the weakness in starts is discouraging, there is a glimmer of hope. The best leading indicator of housing starts is Building Permits. There the news was significantly better, at least from a near-term economic growth point of view.
For the month, total permits rose 16.7% to an annual rate of 635,000 but were down 6.8% year over year. That was well above the consensus expectations for a 560,000 rate. Also, November was revised up, from a 530,000 rate to 544,000. The strength, however, was mostly in the volatile multi-family segment.
Single-family permits were up 5.5% on the month, but down 14.9% year over year. Condo permits soared 60.7% on the month and are up 18.6% year over year. Also, the permit rate is well above the start rate, so we can probably look forward to at least a bit of a bounce in starts in January or February. That could be a cause of growth picking up a bit in the first quarter.
Regionally, the South was the weakest, with permits down 7.6% on the month and off 24.9% year over year. The Northeast saw permits soar 80.6% for the month and up 14.2% from a year ago. Out West, permits rose 43.9% for the month and were up 28.4% from a year ago. The Midwest region saw a monthly increase of 3.3% but a year over year decline of 20.5%.
There is a certain level of ambiguity about if a rise in starts is good news or bad. We need less supply to help the market clear, but in the meantime, the economy is going to be stuck in limbo, unless we can find another locomotive to help pull us forward. The one we have always relied on in the past is clearly derailed.
More Spending the Key?
Additional government spending on infrastructure would be the logical solution. After all, we have huge needs to rebuild out crumbling infrastructure. Better infrastructure would enhance our long-term economic competitiveness.
The government would not be competing for resources with the private sector -- it would be competing with idleness. Even with the recent rebound in interest rates, the cost of financing the infrastructure rebuild would be extremely low, give that T-note yields are near record lows across the yield curve.
However, in the current political environment, that is not gong to happen as the incoming Congress is more likely to slash existing infrastructure spending rather than increase it. This is following the absolutely daft economic theory that putting an incremental $100,000 into the after-tax income of a mid-level Wall Street investment banker will instill enough confidence in the economy that he/she will produce more jobs, than putting an unemployed construction worker back to work fixing our bridges so they don't collapse on us. Well, whoever said Congress is logical?
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The total starts number was below consensus expectations of a 550,000 annual rate. The extremely weak rate of new home construction is a major drag on the economy. It is the principal reason that this recovery feels so anemic.
The silver cloud is that fewer starts means that there are fewer houses added to the inventory of houses looking for buyers. We still face an inventory glut, so a weak homebuilding industry is a key part of the repair process for the housing market. Housing Starts peaked in June of 2006 at an annual rate of 2.273 million. We are thus still 76.7% off of the peak levels.
It is hard to overstate just how important housing starts are to the economy. Yes, at this point, residential investment has declined to the point where it looks almost insignificant -- just 2.22% of GDP in the third quarter, down from 6.34% of GDP at the height of the housing bubble. However, historically, residential investment -- of which new home construction is the largest part -- has always been the main locomotive in pulling the economy out of recessions.
Take a good hard look at the first graph below (from http://www.calculatedriskblog.com/) and the relationship between when the lines bottom and the light blue recession bars. If you want to know why this recovery seems so anemic, look no further than this graph. Even the 2001 recession, which was not caused by a housing downturn, saw a sharp acceleration in housing starts as the recession came to an end.
Of course, since starts were jumping but were not starting from a depressed level, that boom later became known as the housing bubble that put us in this mess to begin with. Every other recession was preceded by a sharp fall in housing starts.
This is no coincidence. Each new home built generates a huge amount of economic activity. It put construction workers back to work, and construction workers have been particularly hard hit in the Great Recession, accounting for over 25% of the total jobs lost, even thought they were less than 6% of the total workforce when the recession started.
The effects go much further than just the profitability of D.R. Horton (DHI). Each new home requires a lot of lumber from a firm like Plum Creek Timber (PCL), roofing and insulation materials from Johns Manville (part of Berkshire Hathaway, BRK.B) and wallboard from USG (USG).
This list goes on and on, but it also means jobs for the lumberjacks and factory workers in those plants. They are not included in that "one out of four jobs lost" figure. As they and the construction workers go back to work they are also going to have more money to spend -- perhaps even go out to eat at Bob Evans (BOBE) -- thus creating jobs for cooks, waitresses and busboys.
Housing Central to Economy
Why is housing so central, as opposed to other industries? Why does it hold the key to the economy booming or busting? Because it is exquisitely sensitive to interest rates -- or at least it was before the avalanche of houses in foreclosure simply swamped the housing market. Even record-low mortgage interest rates don't seem to be moving the needle.
The simple fact is that during the housing bubble we built far too many homes, and we now have a glut of empty homes around the country. Most estimates put the excess vacancies at between 1.5 to 2 million (including rental units).
The second graph (also from http://www.calculatedriskblog.com/) shows the homeowner vacancy rate over time. While it is off its peak, it is still far above normal. In such a situation, it seems economic folly to simply build more houses and add to the glut. But if we don't build houses, the economy remains stuck in a rut. From a strict “allocation of resources” point of view, we would want to see slow housing starts until the vacancy rate fell back to more normal levels.
Thus, one can argue that in the long term falling housing starts is a good thing, as it means fewer new homes adding to the glut. That, however, is extremely cold comfort to the millions of construction workers who are out of work. It is also going to be very difficult to create a sustained growing economy if home building continues to be a drag.
If residential investment (of which new home construction is the largest part) had simply remained at the depressed levels of the second quarter, rather than declining further, the economy would have grown at a 3.25% rate in the third quarter rather than at just 2.50%.
The current numbers seem to indicate that residential investment will not be a drag in the fourth quarter, and might actually be a slight contributor. Just not acting like a brake will allow significant acceleration in economic growth in the fourth quarter.
Results by Region
Regionally, the housing starts numbers were all over the lot. On a month-to-month basis, the West was the strongest by far, with total starts rising 45.8% on the month, and up 28.4% year over year. The Midwest was the weakest for the month, with a 38.4% decline, and down 26.6% year over year. The South, which is by far the largest of the four regions, accounting for 49.5% of all starts, was down 2.2% on the month and is down 16.0% from a year ago. The Northeast, the smallest region, was down 24.7% on the month and off 4.9% year over year.
While the numbers are seasonally adjusted, the weather in the Northeast and Midwest was worse than normal in December, and that might have played a role in the month's weakness.
Building Permits
While the weakness in starts is discouraging, there is a glimmer of hope. The best leading indicator of housing starts is Building Permits. There the news was significantly better, at least from a near-term economic growth point of view.
For the month, total permits rose 16.7% to an annual rate of 635,000 but were down 6.8% year over year. That was well above the consensus expectations for a 560,000 rate. Also, November was revised up, from a 530,000 rate to 544,000. The strength, however, was mostly in the volatile multi-family segment.
Single-family permits were up 5.5% on the month, but down 14.9% year over year. Condo permits soared 60.7% on the month and are up 18.6% year over year. Also, the permit rate is well above the start rate, so we can probably look forward to at least a bit of a bounce in starts in January or February. That could be a cause of growth picking up a bit in the first quarter.
Regionally, the South was the weakest, with permits down 7.6% on the month and off 24.9% year over year. The Northeast saw permits soar 80.6% for the month and up 14.2% from a year ago. Out West, permits rose 43.9% for the month and were up 28.4% from a year ago. The Midwest region saw a monthly increase of 3.3% but a year over year decline of 20.5%.
There is a certain level of ambiguity about if a rise in starts is good news or bad. We need less supply to help the market clear, but in the meantime, the economy is going to be stuck in limbo, unless we can find another locomotive to help pull us forward. The one we have always relied on in the past is clearly derailed.
More Spending the Key?
Additional government spending on infrastructure would be the logical solution. After all, we have huge needs to rebuild out crumbling infrastructure. Better infrastructure would enhance our long-term economic competitiveness.
The government would not be competing for resources with the private sector -- it would be competing with idleness. Even with the recent rebound in interest rates, the cost of financing the infrastructure rebuild would be extremely low, give that T-note yields are near record lows across the yield curve.
However, in the current political environment, that is not gong to happen as the incoming Congress is more likely to slash existing infrastructure spending rather than increase it. This is following the absolutely daft economic theory that putting an incremental $100,000 into the after-tax income of a mid-level Wall Street investment banker will instill enough confidence in the economy that he/she will produce more jobs, than putting an unemployed construction worker back to work fixing our bridges so they don't collapse on us. Well, whoever said Congress is logical?
D R HORTON INC (DHI): Free Stock Analysis Report
MASCO (MAS): Free Stock Analysis Report
PLUM CREEK TMBR (PCL): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
Zacks Investment Research
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