Starts Up, Permits Down, Plateau Ahead

The April increase in housing starts, particularly single family starts, is exactly what I expected given the approaching end of the home buyer tax credits and the beginning of a housing market that moves with underlying economic factors.  Home builders were probably able to start a few modest homes and still expect to complete them in time to deliver before the end of the tax-credit qualification period of June 30. But, I expect they also started some homes to replace the ones they already sold because of the tax credits.

The 10.2% single family starts increase was reasonably broad-based and in line with the gradual increases that started in early 2009.   Multifamily starts (units in 2+ buildings) fell 18.6% with most of that decline in the South and West as that market continues to adjust to a shadow inventory of foreclosed and short-sale homes put up for rent.

April single family building permits declined 10.7% with a slightly larger fall in the South and West.  March permits were up as it looks like builders stocked up before the end of the tax credit deadline so some of the decline was due to drawing down permits already in hand.  However, I think the fall is also a signal that builders will continue to be cautious about building to the market and not ahead of it. 

Some new home sales in May and June were advanced to take advantage of the home buyer credits so I expect to see a plateau in sales and construction activity as economic factors take the place of incentives.  Home sales will begin to respond to low mortgage rates, relatively stable house prices, good affordability conditions, a recovering employment market, and the pent-up demand that has been postponed during the nearly two-year recession. 

The NAHB/Wells Fargo Housing Market Index did show a 3-point increase in May and all three components of the index, current sales, traffic and six-month expectations, were up.  The index value is the highest in almost three years and indicates to me that builders are confident that the stimulus from the tax credit will be the spark needed to continue the housing recovery.  However, the relative low absolute level of the index (22) also says that home building has a long way to go before it is back to an equilibrium level (an index value of 50).



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