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Multi-Family Housing Starts Soaring - Analyst Blog

We got some good news on the housing front this morning. Housing Starts rose in November to a seasonally adjusted annual rate of 685,000 from 627,000 in October, a rise of 9.3%. The number was much better than the expected level of 627,000. The October numbers were revised slightly lower from 628,000. Relative to a year ago they are up 24.2%.

The question is whether the higher starts are being absorbed by the market, or are simply adding to inventory. This should be answered on December 23th when we get the New Home Sales figures. If they confirm the move in starts, consider it an early Christmas present for the economy.

However, almost all of the strength was in the very volatile multi-family sector (five or more unit apartments and condos). If one looks at only single-family houses, the gains were much more modest. Single-family starts rose to 447,000 from 437,000 in October, a rise of 2.3%, and up 1.5% from a year ago. The volatile multi-family sector jumped by 32.2% on the month to an annual rate of 230,000. Year over year, multi-family starts are up a very robust 180.5% (no, that it not a typo, but it is from a low base).

Better, But Still Awful

The level of housing starts is still awful. The extremely weak rate of new home construction is a major drag on the economy. It is the principal reason that this recovery feels so anemic. Still, this is the highest rate of overall starts since April 2010, and that was only due to the homebuilder tax credit. And this time around there is no artificial stimulus. If you exclude that anomaly, this is the highest level of starts since October 2008, in the middle of the meltdown.

To put it perspective, at the peak of the housing bubble, starts were running at 2.273 million (1/06), so we are still down by 69.9%. For single-family starts it is the highest level since June 2010, and we are down 75.3% from the peak.

We still face an inventory glut, so a weak homebuilding industry is a key part of the repair process for the housing market. However, several years of low starts has started to put a dent in the backlog. After all, the population does continue to grow.

The inventory glut is concentrated in the used-home segment of the market, and that is also where the "shadow inventory" resides. New home inventories are actually near historic lows in absolute terms. The absolute level of used homes on the market is not particularly high, especially if just measured by those that are currently listed. Inventories are, however, still high relative to the current sales rate.

Used homes are pretty good substitutes for new homes, but only if they are in the same market. An empty used house in North Carolina is a very poor substitute for a new house in North Dakota.

The level of housing starts has been very depressed for three years now, and the overall inventory situation (new and used) is still bad relative to the sales rates. That means downward pressure on prices. We will find out about the level of Used Home Sales (and very importantly, inventories) tomorrow.

The Economic "Locomotive" Remains Derailed

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 6.34% of GDP at the height of the housing bubble. Over the long haul, residential investment averages about 4.4% of GDP. 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 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, every other recovery saw housing starts lead the way.

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. They account for over 31.8% of the total private sector jobs decline since the start of the downturn. That is despite being less than 6% of the total workforce when the recession started.

That is just the direct construction jobs, but lower building activity also means fewer jobs in the factories that produce building materials, which are counted as manufacturing jobs. Clearly jobs in mortgage finance are also affected by the housing slowdown. They are not included in that "almost one out of three jobs lost" figure. If they and the construction workers could go back to work, they would have more money to spend, thus creating jobs elsewhere.

Housing starts are not just about profits and jobs at D.R. Horton ( DHI ) and the other homebuilders, but about jobs and profits at firms as diverse as Plum Creek Timber ( PCL ), Masco ( MAS ), and Berkshire Hathaway ( BRK.B ). Indirectly, Wal-Mart ( WMT ), Darden Restaurants ( DRI ) and every other firm that depends on middle and working class discretionary income.

BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report

D R HORTON INC ( DHI ): Free Stock Analysis Report

MASCO ( MAS ): Free Stock Analysis Report

PLUM CREEK TMBR ( PCL ): Free Stock Analysis Report

WAL-MART STORES ( WMT ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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