Thursday, November 18, 2010

Q3: Quarterly Housing Starts and Unemployment

by Bill McBride on 11/18/2010 06:33:00 PM

This week the Census Bureau released the "Quarterly Starts and Completions by Purpose and Design" report for Q3 2010. Although this data is Not Seasonally Adjusted (NSA), it shows the trends for several key housing categories.

Housing Starts Click on graph for larger image in new window.

This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.

The number of units built for rent increased sharply in Q3. Although still fairly low, there were 40 thousand rental units started in Q3 2010, almost double the 22 thousand started in Q3 2009. With the rental vacancy rate starting to fall - and no more ill-conceived homebuyer tax credits on the horizon - rental unit construction has probably bottomed. This increase in construction will help a little with employment.

The number of condo units started doubled from last year too - but from close to zero (from 5 thousand in Q3 2009 to 6 thousand last quarter).

The largest category - starts of single family units, built for sale - decreased to 75,000 in Q3 from 92,000 in Q2. Some of this was seasonal, and some was related to end of the tax credit. Starts of owner built units declined in Q3 too.

And an update by request ...

Housing Starts and Unemployment Rate This graph shows single family housing starts and the unemployment rate (inverted) through October. Note: Of course there are many other factors too, but housing is a key sector.

You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

Housing starts (blue) rebounded a little last year,and then moved sideways for some time, before declining again in May.

This is what I expected when I first posted the above graph in August 2009. I wrote:

[T]here is still far too much existing home inventory, a sharp bounce back in housing starts is unlikely, so I think ... a rapid decline in unemployment is also unlikely.
Until the excess housing inventory is reduced, housing starts will stay depressed, and the unemployment rate will probably stay elevated. It does appear progress is being made reducing the excess inventory, but it will take some time. To reduce the excess inventory requires new household formation to be higher than housing starts - and even though housing starts are near record lows, new household formation has also been sluggish - partially because there are few construction jobs!