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Thursday, February 18, 2010 4:28 PM

Big Cheer Over Increase In Housing Starts Is "Much Ado About Nothing"

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The housing recovery is supposedly on. Some think the latest stats are a sign of the pending recovery. I think it's a failure to understand the data. Let's take a look.

Reuters is reporting U.S. housing starts hit 6-month high, output rises.

U.S. housing starts rose to a six-month high in January and industrial output increased solidly, pointing to an economic recovery that was taking a firm hold and respectable first-quarter growth.

Groundbreaking activity for new homes increased 2.8 percent to an annual rate of 591,000 units, reversing the prior month's weather-induced drop, a report from the Commerce Department showed on Wednesday. That was above market expectations for a 580,000-unit pace.

"The data is very solid and very strong," said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut. "The economy gets no respect but it is doing significantly better and we see that on the production side in particular."
Very Solid, Very Strong Data?

Inquiring minds just might wish to consider second and third opinions about "very solid and very strong data".

Calculated Risk has some excellent charts in Housing Starts increase Slightly in January.

click on chart for sharper image

Total housing starts were at 591 thousand (SAAR) in January, up 2.8% from the revised December rate, and up 24% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have moved mostly sideways for eight months.

Single-family starts were at 484 thousand (SAAR) in January, up 1.5% from the revised December rate, and 36% above the record low in January and February 2009 (357 thousand). Just like for total starts, single-family starts have been at about this level for eight months.
The above chart from Calculated Risk shows the bounce is not worth gloating much about.

Forget Housing Starts

In Breakfast With Dave, Rosenberg says "Forget housing starts. Look at units under construction".
Housing Activity Still Weak

Yesterday’s U.S. housing starts report was rather disappointing; especially in light of all the preferential stimulus treatment the sector has been receiving over the past year. Yes, a 2.8% MoM rise was nice but the data is notoriously volatile and at 591k units at an annual rate, they are actually lower now than they were last July when the tax credit to first-time homebuyers was in full swing.

Single-family housing starts did edge up 1.5% MoM but that fell well short of offsetting the 3.0% December decline and starts here are 4.3% below the levels prevailing last summer; and, single-family permits stagnated in January as well. At the same time, prior projects must be getting mothballed because the ‘green shoot’ era of rebounding housing starts during the spring and summer has not followed through because in January we saw both the number of units under construction and completions hit all-time lows! The segment of starts that is holding up is the multi-family sector but we wonder whether a doubling in the past three months is really a good thing at a time when the U.S. nationwide vacancy rate is near a record 11%.

The FT noted yesterday that the latest gimmick being used to solve the mortgage foreclosure problem is the acceleration in ‘short sale’ activity. With all the temporary loan modification and foreclosure moratoria expiring, a wave of new supply is coming onto the market. According to Moodys.com the problem is so acute that there are now a record 4.3 million homes entering the foreclosure process, up from 3.4 million last year. This pipeline is bound to weigh on house prices, which is why short sale approvals are now being sped up so dramatically.

We were sent this little ditty out of Barron’s that showed when all borrowers who are experiencing serious delinquency problems are added to the equation, we are talking about a total of 6.5 million American households — almost twice as large as the number of homes officially listed for sale nationwide. The article goes on to say — get this — that the average loan in foreclosure is 18.5 months overdue, versus 11 months a year ago. The article concludes: “So the next time you’re at a party and wondering, “how is that fellow down the street making ends meet — paying his bills and feeding his kids while unemployed?”. He isn’t.
As usual, the rest of Rosenberg's report is worth a good look as well.

The charts by Calculated Risk and Rosenberg expose comments like "the data is very solid and very strong" as nothing but hype. Indeed excitement over improving data is all "much ado about nothing".

Mike "Mish" Shedlock
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