Housing Picks Up

Before we all declare the war over allow me to remind you about the volatility of the housing starts data: the March report has an enormous statistical error range of +/- 15.2%. That is sufficient to eliminate and reverse any gains in the news.

Having said that the report was a decent one: March starts were up 1.6% to an annualized rate of 626,000 units. More importantly, the March data adds to a string of decent reports, and brings construction back well above the nadir reached in 2009. The only negative chink in the news is the fact that the entire gain was based in the South, while the entire rest of the country showed a decline. Plus, most of the pick-up came in the form of multi-unit dwellings and not in single family homes.

This latter fact is hardly surprising: starts of apartments and condominiums had plunged by 31.8% in the last twelve months. This huge decline masked the equally sharp recovery in single family homes, which had jumped by 47.1% over the same period. As you can see the data bounces around all over the place so getting a good read on the trend line is sometimes very difficult.

To help us predict the next few months we should take into account the fact that building permits have also risen, at an annualized rate of 7.5% in March, which suggests that the recent growth will continue throughout the summer.

That this bounce up is occurring can be no surprise. Developers had slashed construction in the wake of the bubble in order to eliminate the enormous inventory of unsold homes. This tactic had reduced the actual number of homes being actively constructed all the way down to 489,000, the lowest on record. With that extreme low level of activity the inventory has been worked down somewhat and so any demand at all will, of necessity, produce a spurt in new starts. The recent trend is a product of this very sharp cyclical process.

Putting this in context: we should welcome the upturn in construction as a useful component in the economy’s overall recovery. At the same time we should all hope that the ludicrous excesses of the last decade are not repeated, which given the extraordinary adjustment the construction industry has been forced through seems unlikely. This long sought after sanity in real estate implies that even if the industry returns to modest health it will not be the driver of the economy it once was. Remember that construction provided a highly disproportionate share of our job gains throughout the last decade – a decade that was bereft of job growth without construction. So if our outlook of a steady and sane real estate market holds up over the next few years, we will have lost a key engine of job generation, and will have to search more thoroughly in other sectors to replace it.

This then is the classic ‘good news/bad news’ story of economics. The return to health within real estate is a welcome sign of recovery. Unfortunately that shifts the pressure elesewhere.

This year is all about finding that ‘elsewhere’, and getting more jobs.

Meanwhile real estate is not the problem it once was.