by Calculated Risk on 3/18/2009 09:14:00 AM

The American Institute of Architects reports: Architecture Billings Index Continues to Point to Difficult Conditions

A second headline reads: "No region or building sector immune from prolonged economic downturn"

Click on graph for larger image in new window.

Following another historic low score in January, the Architecture Billings Index (ABI) was up two points in February. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the February ABI rating was 35.3, up from the 33.3 mark in January, but still pointing to a general lack of demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry score was 49.5.

“Despite a higher score than last month, we are likely to see light demand for new construction projects through much of the year,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “There is hope that the stimulus bill will result in more project activity, but that is also dependent on banks easing lending standards in the months ahead. Still, the improvement in the inquiries index does provide hope that some stalled projects will resurface in the near future.”

Note that historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending". The ABI fell off a cliff in early 2008 and that decline started showing up in non-residential construction spending in Q4.

The ABI fell off a 2nd cliff in late 2008, and that will show up mid-2009.

Since the index is still well below 50 (anything below 50 means contraction in billings), this suggests non-residential investment in structures will decline all year (no surprise!).

by Calculated Risk on 3/18/2009 08:50:00 AM

From the BLS: Consumer Price Index Summary

On a seasonally adjusted basis, the CPI-U increased 0.4 percent in February after rising 0.3 percent in January. The energy index rose 3.3 percent in February following a 1.7 percent increase in January as the gasoline index rose 8.3 percent in February after a 6.0 percent increase in January. ... About two-thirds of the all items increase was due to the rise in the gasoline index.

Core inflation increased 0.2 percent.

For some reason owners' equivalent rent increased even though rents are falling in most areas:

The indexes for rent and owners' equivalent rent both rose 0.1 percent in February after increasing 0.3 percent in January.

This will probably lower the concern about deflation a little.

by Calculated Risk on 3/17/2009 11:59:00 PM

The new Jet Blue ad campaign is pretty funny. You can see the three parts here. (ht Dave)

Here is part I:

by Calculated Risk on 3/17/2009 09:21:00 PM

Note: I've added a "ShareThis" button to the posts, and I'm now on Twitter.

In my previous post I discussed the question: Housing Starts: Is this the bottom?

We don't know the answer yet.

But some readers are confusing a bottom in housing starts with a bottom in pricing. It doesn't works that way!

There will be two distinct bottoms for housing:

1) First single-family housing starts and new home sales will bottom.

and then followed some time later ...

2) Prices for existing homes will bottom.

Just about every housing bust follows this pattern. The bottom in prices could be a year, or two, or more away. It is way too early to try to call the bottom in prices. House prices will almost certainly fall all year and probably next year too. Prices will continue to fall. Prices are not at the bottom.

Sorry for repeating myself.

Also, it is theoretically possible that single-family housing starts (off 80% from peak) and new home sales (off 78% from peak) could go to zero - but unlikely. Sometime this year housing starts and new home sales will probably bottom, but that doesn't indicate a bottom for house prices.

by Calculated Risk on 3/17/2009 04:25:00 PM

Update: Please don't confuse a bottom in single family housing starts with a bottom in house prices! See next post: Housing: Two Bottoms.

The title to this post would have been laughable in 2008 or 2007, but as I noted in Looking for the Sun, there is a reasonable chance housing starts will bottom sometime this year - so I suppose it is not too early to start looking.

A few key points:

Single-family starts may still fall further. Although I've started looking for the bottom for housing starts, this seems a little early in the year.

Focus on single-family starts. Ignore total housing starts. Multi-family starts are very volatile. Single family starts increased by 1.1% in February - not much.

One month does not make a trend, and housing data is revised significantly. The slight increase in February might just disappear.

Permits for single-family housing units jumped to 373,000 SAAR (starts were 357,000 in February). This suggests starts will probably be higher in March.

Supply is still too high. Months of supply was at an all time record high 13.3 months in January.

Click on graph for larger image in new window.

From the Census Bureau: "The seasonally adjusted estimate of new houses for sale at the end of January was 342,000. This represents a supply of 13.3 months at the current sales rate."

But the increase in Months of Supply has been driven by the denominator (sales), even though the numerator (inventory) has been falling steadily. note: Months of supply = inventory / sales.

The second graph shows the level of hard inventory for new homes (completed plus under construction). With starts below sales, hard inventory has been falling for some time.

Unless sales fall further, the months of supply should start to decline even with the current level of starts.

And this brings up a key point:

It is incorrect to directly compare monthly housing starts to monthly new home sales. 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" to New Home sales on a quarterly basis. The quarterly report shows there were 65,000 single family starts, built for sale, in Q4 2008 and that is less than the 82,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA). This suggests homebuilders were selling more homes than they are starting – but not by much.

However starts have fallen much further in Q1 (almost 25% from Q4) although sales have fallen too (we only have January data for sales so far).

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 isn’t perfect because homebuilders have recently been stuck with “unintentional spec homes” because of the high cancellation rates.

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 several quarters, starts have been below sales – and new home inventories have been falling - but it continues to be a race to the bottom between starts and sales.

Of course, unless sales stabilize soon, starts might have to fall further.

The housing market is still very weak. The NAHB homebuilder index was near the record low this month. Housing starts are just off the record lows of last month. New home sales were at a record low in January. And sales and starts are nominal numbers - not adjusted for changes in population!

Do not expect a sharp rebound in housing starts. Even if this is the bottom in starts (or close to the bottom), there is still too much inventory - especially distressed existing home inventory - for a meaningful rebound in housing starts.

Impact on the economy: If this is near the bottom for housing starts, then the drag on GDP from Residential Investment (RI) will subside (new construction is usually the largest component of RI). As completions fall to the level of starts, the drag on residential construction employment will also ease. And finally, in the temporal order of a business cycle recovery, usually RI has to bottom first ...