housing pemits

If you simply read the headlines you would come away with a distorted view of today’s housing reports from the government. The Financial Times typifies the way in which the good news gets plastered all over the place, and the bad/worse news is buried for only the diligent to locate. The headline reads: “US homebuilding soars in April”

Well sort of.

As a practical matter new home starts did rise nicely in April: up 5.8% to an annual rate of 672,000. If you want to characterize that as ‘soaring’ go ahead. I don’t. It a very good increase, but ‘soaring’? I don’t think so.

The FT goes on to let us know that the increase brings starts to a point 41% up from the same time last year. Now that is soaring! Except, of course that last April was the worst month on record and was appalling by any stretch of the imagination. Frankly anything would feel like soaring after that. Plus, the FT fails to note that starts are still 70% below their peak reached back in 2006, and about 30% below the level most people see as the required rate of construction for our population growth. So we have a long way to go to reach solid ground.

So I offer this as an example of the way in which the financial media – and the stock market – latches on to news and leaves aside inconvenient facts that muddle their predetermined analytical conclusion. The media and the markets want strong growth, that’s what generates business for them, so anything bad gets tossed aside unless its compelling.

And hyperbole is deployed lavishly to support the skew.

Deeper in the government report is less ‘soaring’ news.

Permits for new houses, an indicator that speaks to the likely level of activity later in the year, fell. I suppose we should call their 11.5% decline in April a ‘precipitous plummet’ to keep a balance with the FT’s language for these movements.

From my point of view the permit number is more credible. It has always been a more stable and reliable data series than starts. The problem with the starts data is that a warm month can generate a ton of building activity, and we have no way of knowing whether that activity is representative of a long term trend, or is simply a function of that warmer weather. Yet the financial media latches onto to starts and hardly ever talks about permits.

Having said that the ‘analysis’ offered on the permits number can be quite infantile.

Take this paragraph from MarketWatch.com:

The decline in permits “suggests that future construction activity will be restrained,” wrote Gary Bigg, economist for Bank of America Merrill Lynch.

No?

This is comment with no information content. Of course a decline in permits indicates lower starts activity in the future. Any future start has to be represented, at some point, by a preceding permit. So if the level of permits is lower, now future starts will be lower. Duh.

It might be more helpful to opine as to why this is going on.

Let me take a stab at actual analysis.

It looks as if the government’s subsidy of first time purchasers encouraged a small burst of speculative construction, especially in those parts of the country where there was less overbuilding during the bubble. Looking back in the record, we see that permits jumped a bit when the subsidy was put in place, and the starts associated with that jump are now showing up as new construction.

But.

The subsidy has now gone away, and builders are retreating while they wait to see what shape the recovery takes. The unsold inventory of housing is still quite large by historical standards, especially for this point in an economic cycle. That will dampen construction in the near term. Plus the economy’s fundamental spending power is still weak: wages are not growing quickly; unemployment is still high; and consumers are still focused on debt repayments rather than on asset acquisition. Offsetting that is the fact that interest rates are still low, but credit standards have been tightened and mortgages are tougher to get than during the bubble years.

This all tells me that, while housing is obviously better than it was last year – how could it not be? – it is not booming, jumping or any other thing indicative of a ‘soar’.

Look for a modest housing recovery as the year progresses, with good starts numbers in may and June followed by flatter figures later on.