Housing Starts rose in November to a seasonally adjusted annual rate of 555,000 from 534,000 in September, an increase of 3.9%. The October numbers were revised higher from 519,000, so it is possible to see the increase as 21,000 or 6.9%.
Relative to a year ago, they are down 5.8%. 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 improvement was somewhat better, rising to 465,000 from 435,000 in October (revised down slightly from 436,000), an increase of 6.9%. The volatile multi-family (condo and co-op) sector plunged 18.2% to an annual rate of just 72,000 (although October was revised much higher to 88,000 from 74,000 units). Year over year, single-family starts are down 5.8% and multi-family starts are down 7.7%.
The total starts number was above consensus expectations of a 545,000 annual rate. While the increase, the upward revisions and the beat of expectations are all good news, at least in terms of short-term economic growth, one should not forget just how depressed things are in the housing market.
Housing Starts peaked in June of 2006 at an annual rate of 2.273 million. We are thus still 75.6% off of the peak levels.
Housing Starts Extremely Important
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 6.34% 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 even 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.
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 places to live around the country. Most estimates put the excess vacancies at between 1.5 to 2 million (including rental units).
Glut or Rut?
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 Midwest was the strongest by far, with starts rising 15.8% on the month and up 2.8% year over year. The Northeast, the smallest of the four regions, was the weakest for the month, with a 2.5% decline, but by far the strongest on a year-over-year basis, up 19.7%.
The South, which is by far the largest of the four regions, accounting for 48.5% of all starts, was up 2.3% on the month but is down 11.2% from a year ago. The West posted a 2.1% increase for the month, but is down 14.2% year over year.
Building Permits
While the strength in starts is encouraging, it does not look like it is destined to last. The best leading indicator of housing starts are Building Permits. There the news was significantly worse, at least from a near-term economic growth point of view.
For the month, total permits fell 4.0% to an annual rate of 530,000 and were down 14.7% year over year. That was well below the consensus expectations for a 560,000 rate. October was revised up slightly, from a 550,000 rate to 552,000. The weakness, however, was all in the volatile multi-family segment. Single-family permits were up 3.0% on the month, but down 14.9% year over year. Condo permits plunged 24.2% on the month and are down 11.3% year over year.
Also, the permit rate is below the start rate, so we can probably look forward to at least a bit of a slide in December or January. That could be a cause of growth slowing a bit in the first quarter.
Regionally, the Midwest was the weakest, with permits down 22.2% on the month and off 23.6% year over year. The Northeast saw permits fall 8.3% for the month and down 13.2% from a year ago. Out West, permits rose 2.7% for the month and were down 1.7% from a year ago. The all-important South region saw a monthly increase of 1.9% but a year over year decline of 16.7%.
A Possible Solution
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, 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. 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. 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 Congress is logical? Of course, there is always the theory that the incoming Republican-leaning 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 the White House back in 2012. Generally it is a mistake to ascribe to malice that which can easily be explained by incompetence, but it seems pretty hard to do in this case.
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If one looks at only single-family houses, the improvement was somewhat better, rising to 465,000 from 435,000 in October (revised down slightly from 436,000), an increase of 6.9%. The volatile multi-family (condo and co-op) sector plunged 18.2% to an annual rate of just 72,000 (although October was revised much higher to 88,000 from 74,000 units). Year over year, single-family starts are down 5.8% and multi-family starts are down 7.7%.
The total starts number was above consensus expectations of a 545,000 annual rate. While the increase, the upward revisions and the beat of expectations are all good news, at least in terms of short-term economic growth, one should not forget just how depressed things are in the housing market.
Housing Starts peaked in June of 2006 at an annual rate of 2.273 million. We are thus still 75.6% off of the peak levels.
Housing Starts Extremely Important
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 6.34% 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 even 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.
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 places to live around the country. Most estimates put the excess vacancies at between 1.5 to 2 million (including rental units).
Glut or Rut?
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 Midwest was the strongest by far, with starts rising 15.8% on the month and up 2.8% year over year. The Northeast, the smallest of the four regions, was the weakest for the month, with a 2.5% decline, but by far the strongest on a year-over-year basis, up 19.7%.
The South, which is by far the largest of the four regions, accounting for 48.5% of all starts, was up 2.3% on the month but is down 11.2% from a year ago. The West posted a 2.1% increase for the month, but is down 14.2% year over year.
Building Permits
While the strength in starts is encouraging, it does not look like it is destined to last. The best leading indicator of housing starts are Building Permits. There the news was significantly worse, at least from a near-term economic growth point of view.
For the month, total permits fell 4.0% to an annual rate of 530,000 and were down 14.7% year over year. That was well below the consensus expectations for a 560,000 rate. October was revised up slightly, from a 550,000 rate to 552,000. The weakness, however, was all in the volatile multi-family segment. Single-family permits were up 3.0% on the month, but down 14.9% year over year. Condo permits plunged 24.2% on the month and are down 11.3% year over year.
Also, the permit rate is below the start rate, so we can probably look forward to at least a bit of a slide in December or January. That could be a cause of growth slowing a bit in the first quarter.
Regionally, the Midwest was the weakest, with permits down 22.2% on the month and off 23.6% year over year. The Northeast saw permits fall 8.3% for the month and down 13.2% from a year ago. Out West, permits rose 2.7% for the month and were down 1.7% from a year ago. The all-important South region saw a monthly increase of 1.9% but a year over year decline of 16.7%.
A Possible Solution
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, 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. 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. 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 Congress is logical? Of course, there is always the theory that the incoming Republican-leaning 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 the White House back in 2012. Generally it is a mistake to ascribe to malice 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
BERKSHIRE HTH-B (BRK.B): 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
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