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Some relief from gloomy U.S. housing news in June and “knock on” effects in Canada

07/19/2011 by Alex Carrick, RCD Canadian Chief Economist

It may be just a blip in the curve, but U.S. housing starts in June were more upbeat than at any time since January 2011, on a seasonally adjusted and annualized basis, according to the latest government statistics.

As set out in a joint press release issued by the Census Bureau and Department of Housing and Urban Development, U.S. home ground-breakings rose 14.6% between May and June and 16.7% between May of this year and the same month a year ago.

June’s figure was 629,000 units. Monthly starts have been higher only rarely over the past two-and-a-half years – in January 2011 (at 636,000 units) and in April 2010 (687,000 units) when a hefty tax incentive of up to $10,000 for first-time new homebuyers was winding down.

Otherwise, one has to go back to November 2008 (652,000 units) to find a starts level as high.

Is this the beginning of a breakout in starts from their deeply depressed levels of the recent past? To employ a cliché, one month does not a trend make. But at the same time, and using another well-known phrase, the longest journey begins with a single step.

For the sake of U.S. householders, consumer confidence, the U.S. jobs market and the world economy in general, let’s hope the homebuilding sector south of the border is in the process of waking up from its hibernation.

As an indication of what’s to come, residential building permits were also ahead on a month-over-month basis in June, but only by 2.5%. Year over year, they were +6.7%.

For the U.S. in total, average monthly home starts were 4.8% less in the first half of this year than during the same time frame last year.

On the same basis, all four major geographic regions were down to similar degrees – the Northeast, -4.5%; Midwest, -4.3%; South, -5.6%; and West, -3.4%.

But let’s return to month-over-month and year-over-year comparisons. It’s good to finally be reporting some positive percentage changes.

Regionally, the month-to-month increases in June were led by the Northeast (+35.1%), followed by the Midwest (+25.3%), South (+10.6%) and West (+5.4%).

Year over year, the ranking was Midwest first (+45.9%), West second (+25.9%), then Northeast (+28.3%) and South (+2.1%).

Throughout this year, the multiples market has been showing more life than singles. That’s because a young adult demographic is graduating from college, finding employment in high-tech and other knowledge industries and moving out of the family home.

The additions to rental demand are now being mainly supplied by re-purposed condo units.

Year-to-date multiple unit starts are +56.2% versus their average over the first six months of last year. In June alone, they were +30.4% month to month and +100.0% year over year.

But singles did perk up a bit in June. While they were -17.1% on a year-to-date basis, and only +0.4% year over year, their month-to-month performance was +9.4%.

Any better news on the U.S. economy is greeted with cheers on this side of the border. The housing market has stayed strong in Canada and there have been healthy increases in employment.

Nevertheless, there are worries about the spillover – the commonly-used modern terminology is “knock on” – effects from a U.S. economy that is doing more poorly than it should be.

The Bank of Canada, at its most recent rate-setting meeting decided to keep interest rates where they are for the time being (i.e., 1.00% for the target overnight rate), while acknowledging that inflation has heated up. The BOC’s key observations appear in the final two sentences of the press release that accompanied the interest rate announcement.

Those comments were as follows: “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered.”

In other words, interest rates will be moved up if inflation gets out of hand, but extreme caution will be used, given that other circumstances with regard to the economy, such as a too-pronounced slowdown, may take precedence.

On that final point, the June leading indicator series from Statistics Canada offered up a warmed-over side-dish rather than a tasty main course. The month-to-month change dropped back from +0.8% in May to only +0.2% in the latest month. Six of the ten sub-indices either stayed flat or declined.

With respect to the former, the money supply and new durable orders showed no movement. As for the latter, the S&P/TSX stock price index (-0.4%), average manufacturing workweek in hours (-0.3%), other durable goods sales (-0.3%) and shipments/inventories of finished goods ratio (-0.01 points) all declined.  

June’s leading indicator result was the weakest going back nine months to September 2010 (-0.2%).

U.S. monthly housing starts
U.S. monthly housing starts
Jan-Jun average 2010 = 0.608 million units;
Jan-Jun average 2011 = 0.579 million units (-4.8%).
U.S. Annual Starts:
2006 = 1.801 million units (-12.9%);
2007 = 1.355 million units (-24.8%);
2008 = 0.906 million units (-33.1%);
2009 = 0.554 million units (-38.8%);
2009 = 0.587 million units (+5.9%).
Data source: U.S. Census Bureau (Department of Commerce).
Chart: Reed Construction Data - CanaData.
Canada's composite leading indicator index (1992 = 100)
Canada's composite leading indicator index (1992 = 100)
Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.

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