In October,
Housing Starts fell to a seasonally adjusted annual rate of just 529,000, a 10.6% decline from September and down 30.7% from a year ago. That puts housing starts at their lowest level since April, and takes a lot of steam out of the incipient economic recovery.
Most of the damage, however, came in the very volatile apartment and condo area. Starts in buildings with five or more units dropped to their lowest level yet in this cycle at an annualized rate of just 48,000. That is down 33.3% from September and is off 78.1% from an already depressed level of a year ago.
When most people think about housing starts, they think about single family starts. There the news was bad, but not quite as bad as the news from "condo-land." Nationwide, single-family housing starts fell 6.8% from September and are down 10.9% from a year ago, the lowest level of single-family housing starts since June.
Geographically, the declines were widespread. On a monthly basis the hardest hit area was the Northeast, which is fortunately the smallest and least important of the four regions (10.6% of the total in October) when it comes to housing starts (and just about any other housing related data). Starts there fell by 18.8% for the month and are down 26.3% on a year-over-year basis.
It was not just a case of the Northeast having relatively more condos and apartments than other areas of the country, as single family starts there were down by 9.6% for the month. The next worst hit was the Midwest, where starts fell by 10.6% for the month and are down 23.1% year-over-year.
The very large and important South region suffered a 9.6% decline for the month and is down 33.2% year over year. In October, the South was responsible for 51.4% of all housing starts nationwide. Out West, housing starts were down by 8.5% for the month and down 32.1% year over year.
Looking forward, the best indicator of future housing starts is
Building Permits. There, too, the news was on the downbeat side, with nationwide permits at a seasonally adjusted annual rate of 552,000, down by 4.0% from September and off 24.3% from a year ago. There, however, the declines were very much centered on the Apartment and Condo area, with single-family permits down just 0.2% for the month and 4.0% on a year-over-year basis. Building permits for buildings with five or more units, on the other hand, plunged by 18.3% for the month and are off 62.4% from a year ago.
Regionally, the permits data is sort of opposite what we saw with starts. The worst-hit areas on a month-to-month basis were the West, down 6.7%, and the South, down 5.8%. In contrast, permits in the Northeast were unchanged, and building permits actually rose by 2.0% in the Midwest. On a year-over-year basis, that pattern also holds up, with the Northeast down just 15.8% followed by the Midwest, down 22.9%, the South, down 24.5% and the West, which is down 29.1% year over year.
I'll admit to having mixed feelings about this report. It was clearly much weaker than consensus expectations, which were for starts to rise to 600,000 from 592,000 in September and for permits to increase to 580,000 from 572,000 last month.
Housing is traditionally one of the most important locomotives pulling the U.S. economy out of a recession, and an increase in housing starts is a good leading indicator of unemployment peaking. Thus this report is very bad news for the economic recovery, the second gut punch in as many days after the very weak report on industrial production and capacity utilization yesterday.
The relationship between housing starts and the unemployment rate (inverted) can be seen clearly in the first graph below (from
http://www.calculatedriskblog.com/). This is very bad news for the economy over the next several months. It means that the unemployment rate is going to stay elevated for longer than it otherwise would have.
On the other hand, it is not like the U.S. is suffering from a shortage of housing. As a matter of fact, as the second graph (also from
http://www.calculatedriskblog.com/) shows, the vacancy rate is sitting at a record high and is still rising. If you have a whole bunch of homes just sitting empty, it is just plain stupid to be building a lot more of them. There are much better and more productive places we could be investing our money.
Housing prices are still under pressure, despite unprecedented steps by the Federal government and the Federal Reserve to prop up the price of that asset class. Artificial government support is not as durable a way to prop up prices as a better balance between supply and demand would be.
Well, if prices are going down, the last thing you want to see is more new supply on the market. Thus, in the long term, the decline in housing starts is a good thing. If we stop building houses for long enough, then population growth will start to bring the vacancy rate down. On the other hand, as Lord Keynes famously said, “In the long run we are all dead."
One thing is abundantly clear: this report was not good news for the homebuilders like
D.R. Horton (
DHI) and
Pulte (
PHM), nor was it encouraging to suppliers to the industry like
Owens Corning (
OC) or
Masco (
MAS). It is also bad news for millions of construction workers who are now unemployed.
It is also yet another reason for the Fed to keep interest rates down very low for a very long time. The only reason for the Fed to consider increasing the Fed funds rate would be if we were going to have a very sharp V shaped recovery. With Housing Starts and Permits falling again, that just simply is not going to happen.
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