Monday, April 11, 2011

Housing Starts: Vacant Units and Unemployment Rate

by Bill McBride on 4/11/2011 02:51:00 PM

An update to a couple of graphs ...

The first graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S.

Back in 2009, I used this chart to argue that there would be no "V shaped" recovery, and that housing starts wouldn't rebound rapidly. See: Housing Starts and Vacant Units: No "V" Shaped Recovery.

Note: Housing starts are through February, and the combined vacancy rate through Q4 based on the Census Bureau HVS vacancy rates for owner occupied and rental housing.

Housing Starts and Vacant Housing Units Click on graph for larger image in graph gallery.

The good news is the total vacancy rate is declining (and based on recent Reis' data, the vacancy rate will fall further in Q1 2011). We know that the homebuilders will complete a record low number of housing units in 2011, and the declining vacancy rate suggests more households are being formed than net housing units added to the housing stock, or in other words, the excess supply is being absorbed.

There will be some increase in building this year (mostly in multi-family), but the recovery in construction will remain sluggish until more of the excess supply is absorbed. I'd like to see this measure of vacancy down to 4.5% or even 4.0%.

Looking at the graph, the vacancy rate continued to climb even after housing starts fell off a cliff. Initially this was because of a significant number of completions. Then some hidden inventory (like some 2nd homes) probably became available for sale or for rent, and also some households doubled up because of tough economic times.

Housing Starts and Unemployment Rate The second graph shows single family housing starts (through February) and the unemployment rate (inverted) through March. Note: there are many other factors too impacting unemployment, 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) have declined recently - but have mostly moved sideways for the last two years. This is one of the reasons the unemployment rate has stayed elevated compared to previous recoveries.

The good news is residential investment should increase modestly this year, and that will help push down the unemployment rate. But I still think the labor market recovery will be sluggish until the excess housing supply is absorbed.

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