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U.S. New Homes Market Continued to Stumble Along in March

04/17/2012 by Alex Carrick, RCD Canadian Chief Economist

U.S.housing starts in March dropped back to their lowest level in five months, according to a joint press release from the Census Bureau and the Department of Housing and Urban Development.

The March level of groundbreakings was 654,000 units seasonally adjusted and annualized, down 5.8% versus February’s 694,000 units, but up 10.3% when compared with March 2011’s figure of 593,000 units.

The kick-off month of this year, January, recorded the highest level of starts since October 2008. That seemed to indicate the market might finally be turning around.

Furthermore, the number published for January last month, at 706,000 units, was revised upward in the latest report to 714,000 units.

Climbing above 700,000 units on a consistent basis would be a significant breakthrough. The only other time it’s been achieved recently was in November last year at 702,000 units.

Unfortunately, the early promise seems to have faltered. The drop-down in starts in March is disappointing news. The permit numbers are more upbeat, though.

Building permits – which lead starts by a couple of months – were strong in the latest month. At 754,000 units, seasonally adjusted and annualized, they set a new high since the fall of 2008.

On a month-to-month basis, residential building permits in March were +4.5%. Where they really shone was on a year-over-year basis, +30.1%. In other words, they were ahead by nearly a third.

All of the strength in the permit series came from the multi-unit market. The issuance of single-family permits was down slightly versus February.  

The new homes market may have been significantly impacted by the warm weather in the first quarter of this year. Projects were likely brought forward.

Through the first three months, the average level of home starts in the country was +18.0% versus January to March of last year. Regionally, the West (+21.8%) has led the way, followed by the South (+18.7%), Midwest (+18.1%) and Northeast (+9.0%).

There are some competing forces at work influencing residential real estate.
Employment and income gains should be acting to increase demand. Record low mortgage rates are also a reason to buy. And in some markets, the cost of purchasing a new home has become comparable to renting.

But at the same time, a wide differential has opened up between lower-priced resale properties and higher-priced new homes. Bloomberg news is reporting that the median price of an existing home is now $76,000 below that of a new home. This is one of the largest price gaps on record.

The record number of existing homes on the market, due to mortgage foreclosures – let alone the shadow inventory of properties where the banks haven’t taken action yet – is casting a pall over resale home prices. 

This also causes buyers to doubt whether or not now is yet the time to jump back into the market.

Meanwhile in Canada, the home buying frenzy is continuing largely unabated. Analysts keep decrying the risks inherent in inflated prices.

The “bubble” in Canada is being partly imported. Overheated real estate markets in Asia have contributed to the emergence of a newly wealthy class. Some of those individuals and families have been buying condos in Vancouver and Toronto.

If home prices in China plummet, there may be a quick turnaround in the Canadian market as well. The risk is that Chinese investment money will high-tail it back home and/or purchase commitments will be abandoned.

Returning to the American housing market, the following are a couple of amazing aspects to the time line of the weakness.

If conditions continue to improve at their current glacial pace, it will not be for another three or  four years that housing starts return to their normal (i.e., historical) annualized level of between 1.5 million and 1.7 million units.

That’s four years in the future. The collapse of the market began six years ago, in early 2006. Therefore, there will be a lost decade for homebuilders in the U.S. 

The Federal Reserve has already committed to keeping the federal funds rate near where it is (i.e., essentially 0.00%) until the end of 2014. That will be halfway through the next Presidential term.

This all seems too negative to me. I suspect that by the end of this year, a definite improvement will be apparent and that the momentum will accumulate throughout 2013.

Such a scenario depends on employment staying at the 150,000+ per month level well into the future, with accompanying healthy income advances.

How likely is this? The International Monetary Fund (IMF) is coming around to a better conclusion about the outlook.

The IMF’s April projection of world growth is for +3.5% this year and +4.1% next year. In the agency’s previous (January) report, the percentage changes were +3.3% and +4.0% respectively.

The major reason for the upgrade is a stronger U.S. economy.

GDP in America is now expected to rise 2.1% in 2012 (versus a previously estimated 1.8%) and 2.4% in 2013 (versus 2.2% as calculated by the IMF in January).

U.S. monthly housing starts
U.S. monthly housing starts
Jan-Mar average 2011 = 0.582 million units;
Jan-Mar average 2012 = 0.687 million units (+18.0%).
U.S. Annual Starts:
2007 = 1.355 million units (-24.8%);
2008 = 0.906 million units (-33.1%);
2009 = 0.555 million units (-38.8%);
2010 = 0.587 million units (+5.9%);
2011 = 0.609 million units (+3.8%).
Data source: U.S. Census Bureau (Department of Commerce).
Chart: Reed Construction Data - CanaData.
U.S. and Canada: monthly housing starts
(seasonally adjusted at annual rates)
U.S. and Canada: Monthly housing starts
Data source: U.S. Census Bureau (Department of Commerce) and Canada Mortgage and Housing Corp. (CMHC).
Chart: Reed Construction Data - CanaData.
U.S. regional housing starts
U.S. northeast housing starts   
 
U.S. midwest housing starts     
U.S. northeast housing starts   U.S. midwest housing starts
U.S. northeast annual starts:
2010 = 71,600 units;
2011 = 67,700 units (-5.4%).
 
U.S. midwest annual starts:
2010 = 97,900 units;
2011 = 100,900 units (+3.1%).
Jan-Mar average 2011 = 70,000 units;
Jan-Mar average 2012 = 76,300 units (+9.0%).
 
Jan-Mar average 2011 = 86,300 units;
Jan-Mar average 2012 = 102,000 units (+18.1%).
     
U.S. south housing starts       
 
U.S. west housing starts        
U.S. south housing starts   U.S. west housing starts
U.S. south annual starts:
2010 = 297,500 units;
2011 = 307,800 units (+3.5%).
 
U.S. west annual starts:
2010 = 119,900 units;
2011 = 132,500 units (+10.5%).
Jan-Mar average 2011 = 317,700 units;
Jan-Mar average 2012 = 377,000 units (+18.7%).
  Jan-Mar average 2011 = 108,300 units;
Jan-Mar average 2012 = 132,000 units (+21.8%).
Data source: U.S. Census Bureau (Department of Commerce).
Chart: Reed Construction Data - CanaData.

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