New Residential Construction (Census Bureau)- June 09

(July 17, 2009 Release)

Highlights

• Residential housing construction registered 582,000 units in June, up 3.6 percent from May. Total starts are now at the highest level since November of last year.
• The 3 month average is 541,000 which has risen during the past two months.

• Most of the increase in starts were due to single family construction activity rather than multi-family activity. Single family starts were up 14.4 percent in June while multi family starts were down 25.8 percent.
• Building permits rose 8.7 percent in June to 563,000, which portends favorably for future residential construction activity.

Source: Census Bureau

Analysis

The larger than expected increase in housing starts in June was welcome news. Moreover, the Census Bureau revised upward the May figure by almost 6 percent. Increases in both single family starts and building permits give some credence that the housing construction activity hit bottom several months ago. Single family starts have been steadily rising since January of this year. The Northeast and Midwest regions showed the most strength in starts, increasing 28.6 percent and 33.3 percent, respectively.

Today’s housing starts data suggests that the housing sector may be improving. All three major housing measures- starts, existing home sales and new home sales- are above their cyclical lows. And even though housing inventories remain excessive, the supply of homes on market has slowly come down. In fact, the new homes inventory levels are within a healthy range under normal housing conditions. The good news is that mortgage rates are near historic lows and home prices have dropped considerably, improving affordability conditions. We also believe that the fiscal stimulus package offers a positive influence on the housing sector. Finally, Obama’s foreclosure mitigation plan is expected to slow the pace of foreclosures, providing more opportunities for new home sales.

Conversely, the housing sector remains very weak and there remain risks to the downside; there has been upward pressure on mortgage rates in recent months. In addition, even though single family housing starts are improving , they are still 28 perecent below the pace of a year ago. Further, building permits are 52 percent below its year ago pace. We also recommend some caution knowing that the federal homebuyer tax credit will be expiring on December 1 and the California homebuyer tax credit has run out of funds. It appears that these tax credits helped boost construction activity in the short term. As the tax credits unwind, it is likely that new housing construction activity will follow suit. Finally, the steady flow of new foreclosures entering the marketplace are expected to inhibit future new home sales.