Housing Starts plunged in October to a seasonally adjusted annual rate of 519,000 from 588,000 in September, a decline of 11.7%. Relative to a year ago, they are down 1.9%. Quite frankly, a year ago was also a pretty lousy time for the homebuilders as well.
Most of the month-to-month decline came from the extremely volatile multi-family (Condo and Co-op) sector, which plunged 47.5% to an annual rate of just 74,000 units. That, however, is up 51.0% from an annual rate of just 49,000 a year ago. I told you that was a volatile series. What most people think of when it comes to housing starts -- new single-family homes -- fell 1.1% on the month to an annual rate of 436,000, and down 8.2% from a year ago.
The starts number was far below consensus expectations of a 600,000 annual rate. Also, the September starts were revised sharply lower from an originally reported rate of 610,000. Thus, relative to where we thought starts were running, the month-to-month decline is more like 14.9%. This is a very disappointing report, even if most of the damage came from the Condo sector.
Housing Starts Crucial to Economy
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 over 6.3% 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, which 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 puts 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 firms 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.
The Housing Market & Interest Rates
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 build 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). 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.
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, many for well over a year now, who are on the verge of once again seeing their unemployment benefits come to an end (extended unemployment benefits will expire on 11/30, meaning that about 2 million people will lose their last source of income unless Congress extends them.)
Housing Starts by Region
Regionally, the housing starts numbers were all over the lot. The Northeast was the strongest by far, with starts rising 12.9% on the month, and up 43.6% year over year. That strength is doubly surprising given that the Northeast is the region where multi-family housing is most important, and multi-family starts plunged this month. The Northeast is, however, the smallest and thus least significant of the four census regions. Even with its relative strength, it accounted for just 15.2% of all starts in October, though that is up from just 10.4% of all starts a year ago.
Worst hit by far was the West, where starts plunged 30.5% on the month and are down 13.3% year over year. The South, which is the largest and thus most important housing market, suffered a 13.4% decline on the month and is down 6.7% year over year. The Midwest was down 1.3% for the month and 2.0% year over year.
Building Permits
So what does the future hold for Housing Starts? The best leading indicator of housing starts are Building Permits. There the news was a little bit better, but still pretty ugly. For the month, total permits increased 0.5% to an annual rate of 550,000 and were down 4.5% year over year. That, too, was well below the consensus expectations for a 570,000 rate.
However, September was revised up from a 539,000 rate to 547,000. Single-family permits were up 1.0% on the month, but down 13.2% year over year. Condo permits were up 0.8% on the month and up 31.5% year over year. Also, the permit rate is above the start rate, so we can probably look forward to at least a bit of a bounce in November or December. OK, that is a pretty thin reed I'm clinging to there, but at least the permits data was not as ugly as the Starts data.
Regionally, the Midwest was the strongest, with permits up 14.3% on the month but off 1.9% year over year. The Northeast saw permits unchanged for the month but up 10.3% from a year ago. Out West, permits slipped 0.9% for the month and were unchanged from a year ago. The all-important South region was clearly the weakest, with a 3.4% monthly and a 10.7% yearly decline.
No Traction in Housing
Unless one takes the attitude of a tough coach or physical therapist of “no pain, no gain,” it is hard to see much in the way of a silver lining in this report. Yes, eventually less supply will 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.
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. 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 going 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 they 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 that Congress is logical?
Of course, there is always the theory that the incoming Congress does not want the economy to get better since President Obama would get most of the blame for a weak economy and the GOP would be in a better position to win in 2012. Generally, it is a mistake to ascribe malice to that which can easily be explained by incompetence, but it seems pretty hard to do in this case.
BOB EVANS FARMS (BOBE): Free Stock Analysis Report
D R HORTON INC (DHI): Free Stock Analysis Report
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USG CORP (USG): Free Stock Analysis Report
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The starts number was far below consensus expectations of a 600,000 annual rate. Also, the September starts were revised sharply lower from an originally reported rate of 610,000. Thus, relative to where we thought starts were running, the month-to-month decline is more like 14.9%. This is a very disappointing report, even if most of the damage came from the Condo sector.
Housing Starts Crucial to Economy
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 over 6.3% 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, which 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 puts 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 firms 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.
The Housing Market & Interest Rates
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 build 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). 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.
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, many for well over a year now, who are on the verge of once again seeing their unemployment benefits come to an end (extended unemployment benefits will expire on 11/30, meaning that about 2 million people will lose their last source of income unless Congress extends them.)
Housing Starts by Region
Regionally, the housing starts numbers were all over the lot. The Northeast was the strongest by far, with starts rising 12.9% on the month, and up 43.6% year over year. That strength is doubly surprising given that the Northeast is the region where multi-family housing is most important, and multi-family starts plunged this month. The Northeast is, however, the smallest and thus least significant of the four census regions. Even with its relative strength, it accounted for just 15.2% of all starts in October, though that is up from just 10.4% of all starts a year ago.
Worst hit by far was the West, where starts plunged 30.5% on the month and are down 13.3% year over year. The South, which is the largest and thus most important housing market, suffered a 13.4% decline on the month and is down 6.7% year over year. The Midwest was down 1.3% for the month and 2.0% year over year.
Building Permits
So what does the future hold for Housing Starts? The best leading indicator of housing starts are Building Permits. There the news was a little bit better, but still pretty ugly. For the month, total permits increased 0.5% to an annual rate of 550,000 and were down 4.5% year over year. That, too, was well below the consensus expectations for a 570,000 rate.
However, September was revised up from a 539,000 rate to 547,000. Single-family permits were up 1.0% on the month, but down 13.2% year over year. Condo permits were up 0.8% on the month and up 31.5% year over year. Also, the permit rate is above the start rate, so we can probably look forward to at least a bit of a bounce in November or December. OK, that is a pretty thin reed I'm clinging to there, but at least the permits data was not as ugly as the Starts data.
Regionally, the Midwest was the strongest, with permits up 14.3% on the month but off 1.9% year over year. The Northeast saw permits unchanged for the month but up 10.3% from a year ago. Out West, permits slipped 0.9% for the month and were unchanged from a year ago. The all-important South region was clearly the weakest, with a 3.4% monthly and a 10.7% yearly decline.
No Traction in Housing
Unless one takes the attitude of a tough coach or physical therapist of “no pain, no gain,” it is hard to see much in the way of a silver lining in this report. Yes, eventually less supply will 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.
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. 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 going 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 they 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 that Congress is logical?
Of course, there is always the theory that the incoming Congress does not want the economy to get better since President Obama would get most of the blame for a weak economy and the GOP would be in a better position to win in 2012. Generally, it is a mistake to ascribe malice to that which can easily be explained by incompetence, but it seems pretty hard to do in this case.
BOB EVANS FARMS (BOBE): Free Stock Analysis Report
D R HORTON INC (DHI): Free Stock Analysis Report
PLUM CREEK TMBR (PCL): Free Stock Analysis Report
USG CORP (USG): Free Stock Analysis Report
Zacks Investment Research
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