Tuesday, July 20, 2010

Some Silver Lining in the Housing Starts Data

The 5% decline in June's housing starts to 549,000, from a downward revised drop of 14.9% in the prior month, is a stark reminder of the still dismal state of the residential construction sector. By way of a quick comparison, starts were running in the vicinity of 1 million units in the first half of 2008 and over 2 million at the peak of the housing market in 2005.

Source: U.S. Census Bureau

In recent months, the 8,000 tax credit-induced pick-up in existing and new home sales had created the perception that the housing sector might be turning the corner. That impression was based on the blurring of the distinction between starts and sales, particularly since the latter was driven by an admittedly transient factor. The strengthening in the demand for purchases of homes since last fall mostly led to a decline in the previously massive inventory of both new and existing homes but not to a meaningful pick up in construction For housing starts to embark on an even moderate upswing from their depressed levels, it would require a reasonable degree of confidence by the construction industry that the stronger demand for housing is here to stay. We are not at that point yet.

In the meantime, starts remain trapped withing a 500,000 to 650,000 range, which, while plain dismal per se, at least indicates that the market is forming a bottom- which is, of course, by no means tantamount to a turnaround. The perception of the housing starts series forming a bottom also received some cautious support today from a 2.1% rise in building permits, although that was driven by a 20% spike in the noisy multi-family category.

A final note.

Inasmuch as a simple stabilization of housing starts at these historically very low levels is nothing to cheer about, it does imply a waning drag on GDP growth ahead and has been an instrumental factor allowing the current economic recovery to unfold so far.

Residential construction itself (without counting the adverse effect of a collapsing sector on traditional consumer spending on household-related items) subtracted one full percentage point from growth in both 2007 and 2008, and 0.7 percent last year on the whole (it did have a moderate contribution to growth in the second half of the year, which was no match for the big drag it represented in the prior two quarters). While it took out a modest less than 0.3% from growth in Q1 2010, it should be roughly neutral in the balance of the year, removing a key headwind to the halting economic recovery.

Anthony Karydakis