Housing Starts Up – What Does That Mean?

Posted on September 18th, 2009 in All Articles, Market Conditions.

Housing starts are up 3.3% from June to July.  Is this another signal that we may have reached the bottom of the housing slump?  It’s hard to say, but housing starts have decreased by over 70% since the peak of the housing boom.  In fact housing starts are even down some 50%+  from 1995 levels!  It’s safe to assume that housing starts should start gaining month over month (with some possible small declines in the winter months), but it will most likely be at a very slow pace.  Ultimately the unemployment rate needs to decrease to start seeing significant changes in the housing starts statistic in my opinion.  Builders are going to be hesitant to start major projecst, but there may be some builders that are trying to time the upswing, get land now and make a larger profit if there is an uptick in prices next spring.  We’ll see, only time will tell.  It’s probably a safe bet though that housing starts aren’t going to drop significantly more over the next 6 months to 12 months.  I’m more of the glass half full guy – 90% of people still have their jobs and still need a place to live!  Check out this article from the Wall Street Journal and their take on the housing starts stat and what it means.

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After facilitating the economy’s downfall, the housing sector will soon start helping its recovery, though probably not by much.

Census Bureau data on August housing starts are due Thursday morning. Economists think starts rose 3.3% from June to an annualized rate of 600,000 units, the fastest pace since November 2008.

A tentative recovery in home construction might be enough to boost annualized gross-domestic-product growth by as much as 0.5 percentage point, according to some estimates, perhaps as soon as this quarter.

That would be an impressive turn of events. Collapsing residential construction slashed nearly one percentage point, on average, from GDP growth for the past 3½ years in a row.

That starts are gaining ground might seem quizzical, as there is still an oversupply of housing on the market, including a large “shadow” inventory of homes that will eventually enter foreclosure or that are being held off the market while their owners wait for prices to recover.

But many unsold homes might be too large for the first-time buyers that have boosted the market in recent months, spurred by government tax credits, suggests Ian Shepherdson, chief U.S. economist at High Frequency Economics. Home builders can make smaller houses to meet that demand.

Still, there are limits to how much activity is likely to be seen. Builders remain cautious. Though their sentiment has improved, it is still near record lows, according to the latest survey by the National Association of Home Builders.

August’s expected gain would still leave starts down 29% from a year ago and down 74% from the 2.27 million-unit record pace set in January 2006, at the height of the bubble.

Goldman Sachs economists, weighing population growth, inventory and still-high home-vacancy rates, estimate there might be just 850,000 housing starts in 2010 — roughly the pace before the Lehman Brothers collapse a year ago.

That suggests there mightn’t be much more juice in home-builder stocks. The Dow Jones U.S. Home Construction Total Stock Market Index has more than doubled from its November bottom and is near pre-Lehman levels.

It also suggests housing’s contribution to GDP will be minimal.

Still, it’s a start.

Write to Mark Gongloff at mark.gongloff@wsj.com