Housing start woes go deeper than single-month drop

With news Thursday that privately owned housing starts plunged 14.4% in August, many were left scratching their heads at how starts could have printed so poorly.
The August print for housing starts was a seasonally adjusted annual rate of 956,000, well below analyst expectations, but 8% above the August 2013 rate of 885,000.
“The decline in housing starts in August was worse than we or the consensus had anticipated and stands in stark contrast to surging homebuilder confidence,” said Paul Diggle, property economist for Capital Economics. “This weakness should prove temporary, however, with the strengthening economic recovery and shortage of homebuilding relative to household formation set to boost starts over the coming months.”
Troubling in the data is that starts and building permits fell in every region in August. The last time that happened was in October 2009, when the housing crash was still in progress.
Housing starts are little changed from the level at the start of 2013, reflecting a similar stagnation in new home sales. In addition, land and labor shortages have been significant constraints on homebuilders, although these may now be easing.
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Chart: Zerohedge
In a bit of conspicuous incongruity, on Wednesday the National Association of Home Builders/Wells Fargo Housing Market Index hit 59 — the highest level since November 2005. This is the fourth consecutive month it has increased, reaching a nine-year high.
Jonathan Smoke, chief economist for Realtor.com, however said that nothing in the report was really unexpected.
“The totals (permits and starts) were down in August over July, driven by declines in multifamily.  None of the single family numbers were statistically significant— meaning the best we can say about August based on this initial survey sample is that it was likely flat—not hugely up or down,” Smoke said.
“Multifamily new construction is where we have seen most of the growth, not just this year, but every year since 2011.  Multifamily demand continues to benefit from the decline in home ownership and the now record levels of households in the US that rent,” Smoke said.  “We are not seeing rents or vacancies show any wide-spread weakness, so the August reading is simply a reflection of the lumpiness of the data.  We had huge positive numbers in July, which were also revised up.”
Smoke said that on the single family side, the market has seen weakness all year and an inability to see more than low single digit growth over last year.  This level of single family production is half of what a normal market should produce, he said.
“What isn’t normal today is the depressed first-time and entry level market, which is a reflection of the ‘overlay tight’ qualification restrictions.  Meanwhile builders have been investing in lots and product designs reflective of a more qualified buyer— that’s why we’ve seen new home prices and new home sizes grow so much.  But that also means they aren’t building large volumes of affordable homes that the first-time market would need if they could qualify,” Smoke said.
“The numbers are also reflective of regional differences.  The south, where affordability is strong, had a slight increase in single family starts in August over July and is also up 12% year-over-year,” he said.  “The south represents 55% of current single family starts.
“With new single family construction remaining weak, we will continue to see limited overall supply of homes for sale, and finding affordable homes for sale will continue to be challenging,” Smoke said.
“Since early summer, builders in many markets across the nation have been reporting that buyer interest and traffic have picked up, which is a positive sign that the housing market is moving in the right direction,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Delaware.
During the Bipartisan Policy Center’s 2014 Housing Summit, Beth Ann Bovino, chief economist of Standard & Poor’s, said certain negative economic conditions are now turning around, as proof that housing can be sustained.
Diggle noted the disconnect.
“Minor consolations in the data were a 2.2% upward revision to starts in July and the fact that the latest drop ‘only’ reversed three-quarters of the previous gain. But this is clearly a disappointing release,” he said. “But it’s not unusual for the NAHB measure and starts to diverge for extended periods – it’s happened twice before in the early- and late-1990s and on both occasions the divergence ended with a drop in homebuilder confidence rather than a rise in homebuilding.”
Diggle said he thinks the current divergence will end with a significant increase in housing starts.
“After all, labor market conditions are strengthening - demonstrated by the 36,000 drop in initial jobless claims, the largest in two years, to 280,000 last week – and earnings growth looks likely to rise,” he said. “And at 1.4 (million) last year, household formation is outstripping homebuilding. The upshot is that we expect housing starts, which may average 1 (million) this year, to rise to 1.3 (million) in 2015.”