Sunday, February 14, 2010

Housing Market Index, Housing Starts and the Expiring Tax Credit

by Calculated Risk on 2/14/2010 04:43:00 PM

The NAHB Housing Market Index for February, and Housing Starts for January will both be released this week, see: Weekly Summary and a Look Ahead.

As a review, here is a graph showing the relationship between the two series:

HMI and Starts Correlation Click on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the January release for the HMI and the December data for single family starts.

This shows that the HMI and single family starts mostly move in the same direction - although there is plenty of noise month-to-month. Since the NAHB index declined in January (it is released a month ahead of starts), we usually wouldn't expect much of an increase in January single family housing starts.

However there might be an increase in starts (single family) in January since many builders started a few extra homes in anticipation of the expiration of the first time home buyer tax credit. It takes about six months to build an average home, so the builders can't wait until the expected buying rush in April to start building a home - they have to close by the end of June.

Here are some comments from the Feb 2nd D.R. Horton conference call:

In [Q2 2010], we expect strong closings since homes must close by June 30th for the extended tax credit. ... We expect [Q3] will be the most challenging as the tax credit for home sales will have expired. As we move past the selling season, we'll be able to get a better read on core demand and we'll adjust our business accordingly.”
...
We are prepared for the spring selling season and for current demand created by the Federal home buyer tax credit with our current spec level.

We will continue to manage our spec levels very closely as we move closer to the April 30th sales contract deadline for the home buyer tax credit.
Residential investment1 is one of the best leading indicators for the economy, and the best indicators for RI are the NAHB HMI, housing starts, and new home sales. Usually housing starts lead changes in unemployment too - see Housing Starts, Vacant Units and the Unemployment Rate - so the sideways movement in the NAHB HMI and housing starts suggest unemployment will stay elevated for some time.

Note 1: The largest components of residential investment are new home construction, and home improvement. This also includes brokers' commissions and some minor categories.