Interest Rate Roundup

Thursday, January 18, 2007

More thoughts on housing starts and permits

Let's dig into the housing starts and permits report in a little more detail ...

First, the numbers:

* Housing starts rose by 4.5% between November and December. The December seasonally adjusted annual rate of starts, at 1.642 million units, was well above the 1.565 million expected by economists polled by Bloomberg.

* Building permit issuance (a leading indicator of future construction activity) also climbed – 5.5%. The 1.596 million reading for December topped expectations for a 1.505 million reading.

* Revisions to last month’s numbers were mild – starts were revised down slightly (16,000 units), while permits were revised up slightly (7,000 units)

Then, my analysis:

- Interest rates declined from late summer through December. Coupled with extremely generous incentives, this helped prop up home sales and likely encouraged builders to put more shovels in the ground late in the year.

- The weather helped, too – December 2006 was the warmest such month since 1957. Just look at the regional breakdown of starts ... they surged the most in the Northeast (+26%), where temperatures have been far above normal. Starts rose much less in the West (+12%) and the Midwest (+1.8%), and they actually dropped in the South (-2%).

- But there’s something else worth noting in the numbers – single-family home starts and permit issuance remain weak. Starts actually dropped by 52,000 units in the single-family market, a decline of 4.1%. Permits increased a tiny 1.4%. The strength in this report all stemmed from multifamily construction – townhouses, condos, apartment buildings and the like. Starts there vaulted ahead by 42%, while permits surged 19%.

- Why is multifamily leading the way? I see a couple reasons. First, the surge in nationwide home prices has made all housing less affordable. But single-family homes, which cost more on average than condos and townhouses, are even more so. That is likely shifting more buyers, especially first-timers, to purchase townhouses and condos if they’re going to buy anything. Builders are responding by building more of those units.

Construction of property for rent (apartment complexes, for instance) … which has been depressed for a long time … is also likely picking up as builders respond to the strong growth in rental rates over the past couple years. Quarterly construction of multifamily units for rent hit a low of 42,000 in Q1 2006 before rising to 46,000 in Q2 and 48,000 in Q3

Please note that the links in this post are to PDF documents.


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