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Saturday, July 18, 2009

Housing Starts: A Little Bit of Good News

by Calculated Risk on 7/18/2009 05:29:00 PM

For the last few years, whenever housing starts increased, I wrote that was bad news because there was already too much inventory.

Now, even though there is still too much existing home inventory, and too much new home inventory in some areas, it appears that new home sales have stabilized. Since single family housing starts (built for sale) have been below new home sales for six consecutive quarters (through Q1), this suggests single family housing starts should also bottom soon. There is a good chance that has already happened.

Why is that good if there is still too much housing inventory overall?

This increase in starts means that the drag from Residential Investment will slow or stop, and also that residential construction employment is close to the bottom. Residential investment has been a drag on the economy for 14 straight quarters, and just removing that drag will seem like a positive.

And residential construction has lost jobs for several years, and even though construction employment will probably not increase significantly, not losing jobs will also seem like a positive.

This removes drags from the economy - and that is the little bit of good news.

To be clear, this is not great news for the homebuilders. It will take some time to work off all the excess inventory, so new home sales and single family housing starts will probably stay low for some time. And it is possible that new home sales and housing starts could still fall further.

Are new home sales actually below single family starts (built for sale)?

Monthly housing starts (single family starts) cannot be compared directly to new home sales, because the monthly housing starts report from the Census Bureau includes apartments, owner built units and condos that are not included in the new home sales report.

However it is possible to compare "Single Family Starts, Built for Sale", from the Census Bureau's "Quarterly Starts and Completions by Purpose and Design" to New Home sales on a quarterly basis.

The quarterly report shows that there were 52,000 single family starts, built for sale, in Q1 2009 and that is less than the 87,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA). This suggests homebuilders are selling more homes than they are starting.

Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions), although this is not perfect because homebuilders have recently been stuck with “unintentional spec homes” because of the high cancellation rates. However cancellation rates for most homebuilders have fallen sharply recently.

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

This graph provides a quarterly comparison of housing starts and new home sales. In 2005, and most of 2006, starts were higher than sales, and inventories of new homes rose sharply. For the last six quarters, starts have been below sales – and new home inventories have been falling.

What is Residential Investment?

Residential investment is a major investment category reported by the Bureau of Economic Analysis (BEA) as part of the GDP report.

Residential investment, according to the BEA, includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

Residential Investment Components This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures and home improvement.

Investment in home improvement was at a $162.3 billion Seasonally Adjusted Annual Rate (SAAR) in Q1, significantly above investment in single family structures of $113.7 billion (SAAR).

Let's take a closer look at investment in single family structures (usually the largest category):

Residential Investment Single Family Structures As everyone knows, investment in single family structures has fallen off a cliff. This is the component of RI that gets all the media attention - although usually from stories about single family starts and new home sales.

In Q1, investment in single family structures was at 0.8% of GDP, significantly below the average of the last 50 years of 2.35% - and also below the previous record low in 1982 of 1.20%.

Based on the housing starts report, investment in single family structures will probably increase in Q2 for the first time since Q1 2006. This doesn't guarantee that residential investment increased in Q2, because home improvement and the other categories might offset the gains in single family structure investment, but most of the drag on GDP should be gone.