Interest Rate Roundup

Tuesday, June 19, 2007

Permits and starts top expectations on multifamily business

We just got our latest look at housing construction activity. The May figures showed ...

* Housing starts fell 2.1% to a seasonally adjusted annual rate of 1.474 million from 1.506 million in April. April's starts were previously reported as 1.528 million. Economists polled by Bloomberg were expecting a drop of 3.6%. On a year-over-year basis, starts were down just over 24% from 1.944 million in May 2006.

* Building permit issuance rose a greater-than-expected 3% to a SAAR of 1.501 million from 1.457 million in April. April's permit issuance was the lowest since December 1997. On a year-over-year basis, permits were down about 22% from a SAAR of 1.918 million in May 2006.

* By category of construction, single-family starts dropped 3.4%, while multifamily starts rose 3.1%. Permit issuance dropped 1.8% in the single-family market, but shot up 16.5% in the multi-family arena.

* Regionally, starts rose sharply in the Northeast (+15.7%) and the Midwest (+15.5%), but dropped slightly in the South (-1.6%) and severely in the West (-19.7%). Permits dropped 6.5% in the Northeast, but rose 5.4% in the Midwest, 5.3% in the South and 1.1% in the West.

The story this month? Multifamily construction saved the day. Multiple-unit starts offset weakness in single-family starts. The same pattern holds true for permits: Permit issuance for buildings with 5 or more units climbed to its highest level since last June while permit issuance for single-family homes slumped to a fresh cycle low (and the lowest level since July 1997).

Looking at the big picture, the problem remains the same: Inventories of both existing and new homes are extremely high. We had 438,000 new homes and 4.2 million existing homes for sale at last count -- far, far above historical levels (roughly 300,000 to 350,000 in the new home market throughout the 1990s and 1.7 million to 2.5 million in the existing home market in the late 1990s and early 2000s). Until we whittle down those for-sale inventories, builders will remain cautious and home construction will remain weak.


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