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Tuesday, April 17, 2012

Comments on the Housing Recovery and Starts and Completions

by Calculated Risk on 4/17/2012 02:24:00 PM

There are usually two bottoms for housing, the first for new home sales, housing starts and residential investment. The second bottom is for house prices.

For the economy and jobs, the bottom for housing starts and new home sales is more important than the bottom for prices. However individual homeowners and potential home buyers are naturally more interested in prices. So when we discuss a “bottom” for housing, we need to be clear what we mean.

There is no question that housing starts and residential investment have bottomed. And it appears new home sales have also bottomed. For the housing industry, the recovery has started. The debate is about the strength of the recovery, not whether there is a recovery (I think housing will remain sluggish for some time, and I expect 2012 to be another weak year, but better than 2011).

The question about house prices is not as clear. In February I argued NSA prices for the national repeat sales indexes would probably bottom with the March reports. I still think that is correct. There is a long lag between when contracts are signed and when the repeat sales indexes are released.

There are some more timely indicators, but they are not perfect. Examples are the Trulia House Asking Price Monitor, and the John Burns Consulting Home Value Index (not public) that uses contract prices for existing homes and builder reports for new homes. Both the Trulia index and the Burns HVI are suggesting that house prices have bottomed.

Over the next few months I'll focus on house prices, but I just wanted to point out the housing industry recovery has started, and it will probably be sluggish. And for prices, if they have bottomed, they will probably mostly move sidways for some time.

Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

These graphs use a 12 month rolling total for NSA starts and completions.

Multifamily Starts and completionsClick on graph for larger image.

The blue line is for multifamily starts and the red line is for multifamily completions.

The rolling 12 month total for starts (blue line) has been increasing since mid-2010. Although the 12 month total for completions (red line) turned down in March, completions are generally following starts up.

It is important to emphasize that even with a strong increase in multi-family construction, it is 1) from a very low level, and 2) multi-family is a small part of residential investment (RI).

Single family Starts and completionsThis second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

In both February and March, the rolling 12 month total for starts and completions are at about the same level. This is the first this has happened since May 2006. This usually only happens at a bottom, although the recovery for single family starts will probably remain sluggish.