Housing starts declined 4.0%

Data Watch
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Housing starts declined 4.0% in December to 557,000 units at an annual rate
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist

Housing starts declined 4.0% in December to 557,000 units at an annual rate, falling short of the consensus expected 575,000 pace.

All of the decline in starts in December was in single-family units, which fell 6.9% but remain 27.7% above the January/February 2009 low. Multi-unit starts, which are normally very volatile, increased 12.2% in December on top of a 69.8% rebound in November.

Starts declined in the Northeast and Midwest, ticked down only slightly in the West, and increased in the South.

New building permits increased 10.9% in December to a 653,000 annual rate, substantially above the consensus expected level of 580,000. Permits for single-family units increased 8.3% and are up 48.5% versus the low in January 2009.

Implications: Housing starts fell in December but we believe home building is on the verge of a significant rebound. This December was both colder and wetter than usual with much of the eastern seaboard getting the largest December snowfall in recorded history. Although data on housing starts are seasonally-adjusted, the adjustment only considers typical December weather, and is therefore vulnerable to unusually harsh weather the likes of which we got this past month. By contrast, the weather has much less impact on building permits and these are up dramatically. In fact, the 18.5% gain in the past two months is the largest in 20 years. This spike upward has lifted the ratio of permits to starts to the highest level on record (going back to 1960). This figure shows that home builders anticipate being much busier in the year ahead. Although we still have an excess inventory of homes (mainly in California, Florida, Nevada, Arizona, and Michigan), the level of housing starts got so unsustainably slow by early 2009 that inventories can still be worked off even as home building rebounds. Normally, we should be starting homes at a 1.6 million annual rate. Recently, the pace of starts has only been about one-third that level. So once excess home inventories are gone by three years from now, the pace of starts is going to have to be roughly triple recent levels just to prevent an eventual housing shortage.