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Search For Life Continues in Residential Construction

Although not obvious, residential construction may be reaching a bottom.  For almost the first time since mid 2006, more permits to build housing units were issued then construction completion in the month of January 2011.

For over 4 years, there have been more completions than applications to build more housing units.  This has manifested as a slow death spiral of the new housing industry.  In January 2011, there were 35,900 permits issued and 35,200 construction completions (unadjusted data).

One month is not a trend.  One must be aware that weather may have been a factor in delaying housing completions in some parts of the country, while January and February are the months that building permits start to be issued for spring construction. 

BUILDING PERMITS Privately-owned housing units authorized by building permits in January were at a seasonally adjusted annual rate of 562,000. This is 10.4 percent (±1.8%) below the revised December rate of 627,000 and is 10.7 percent (±1.2%) below the January 2010 estimate of 629,000.  Single-family authorizations in January were at a rate of 421,000; this is 4.8 percent (±2.3%) below the revised December figure of 442,000. Authorizations of units in buildings with five units or more were at a rate of 125,000 in January.

HOUSING STARTS Privately-owned housing starts in January were at a seasonally adjusted annual rate of 596,000. This is 14.6 percent (±15.7%)* above the revised December estimate of 520,000, but is 2.6 percent (±9.8%)* below the January 2010 rate of 612,000. Single-family housing starts in January were at a rate of 413,000; this is 1.0 percent (±8.6%)* below the revised December figure of 417,000. The January rate for units in buildings with five units or more was 171,000.

HOUSING COMPLETIONS Privately-owned housing completions in January were at a seasonally adjusted annual rate of 512,000. This is 9.5 percent (±6.3%) below the revised December estimate of 566,000 and is 22.7 percent (±8.3%) below the January 2010 rate of 662,000.  Single-family housing completions in January were at a rate of 428,000; this is 7.0 percent (±7.0%)* below the revised December rate of 460,000. The January rate for units in buildings with five units or more was 77,000.

US Census is using seasonally adjusted data in their analysis.  The unadjusted data says residential new housing permits declined year-over-year 9% (vs the 10.7% decline calculated by US Census using seasonally adjusted data).  Permits are up or down MoM depending on whether pre or post Great Recession benchmarks are used.  Econintersect interprets the new permits data to be slightly down MoM.

The sometimes green shoot – apartments – is up 17% YoY.  Note that 17% is only 1,700 housing units nation wide (maybe China’s housing growth in hours).  Econintersect believes the trend shows a gentle improvement in 2010, but 2011 will be judged against 2010 data.  Will this trend continue late into the year?

Completions are down YoY – and like permits, whether you consider the data up or down MoM depends on the baseline.  The data is just bad if someone is hoping construction will be improving.

It is likely 2011 will see the bottom of the new home construction death spiral based on the softening negative trend lines.  Please refer to Econintersect’s analysis on this subject (analysis here).  The definition of a housing bottom in 2011 will depend upon the course of the economy overall.  With continued gradual economic growth and increased employment at a higher rate than the approximately 800,000 jobs growth in 2010, our projection is reasonable.

If the economy lags the current growth rate which seems to be headed for the 3% or higher annual GDP growth rate, the bottom for housing could extend into 2012.

Whatever the timing of the bottom it is likely to be a broad multi-year process unless economic growth exceeds most current expectations and there are a number of consecutive quarters above 4% GDP growth, accompanied by employment improvement well above 2 million jobs a year for a couple of years at a minimum.

As mentioned earlier in the article, there is strength in the multifamily numbers.  In fact almost all of the improvement over December is in that area.  Housing starts (SA) were up 14.6% over December overall, but multifamily was up 78% while the much larger single family category was actually down 1%.  However these numbers are all very noisy with measurement uncertainty larger than the changes reported.  For single family the 1% decline has an uncertainty of +/-8.6%.

Finally, the extend and pretend process and legal delays regarding foreclosure processing will cushion the bottoming process in a growing economy but could aggravate a further decline to a much lower bottom process in a slowing economy, especially one that goes into recession.

Related Articles

Economic Data Points to Growing Profitability in Residential Builders  by John Lounsbury and Steven Hansen

January Existing Home Sales Outlook:  Terrible, Based on December Pending Home Sales  by Steven Hansen

The Great Debate©:  Will Housing be a Drag on the Economy in 2011? – Part 1  by John Lounsbury

The Great Debate©:  Will Housing be a Drag on the Economy in 2011? – Part 2  by John Lounsbury

The Great Debate©:  Residential Construction is Dead – Or Is It?  by William C. Wheaton and Gleb Nechayev

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