Call it a head fake, fuzzy math, or just what it is: a rules change in one large housing market that has led to some funky-looking numbers released this morning by the United States Census.
The Census, in announcing new seasonally adjusted monthly data of new-home starts and building permits, shows total new-home starts rising 9.1% and total building permits increasing 11.6% in June, despite anecdotal and hard evidence that the housing market is still waist-deep in a years-long funk. The Census’ reported surge is entirely in multifamily development, as single-family home starts are down 5.3% to 647,000 units in June, while single-family building permits fell 3.5% to 613,000, the Census reported Thursday.
The spike in data can be traced to the Northeast, where total home starts jumped 103.6%, while total permits rose 73% from May to June. More specifically, the surge comes from multifamily development in New York City, where a new set of construction codes that went into effect July 1 pushed developers to get building permits for multifamily residential projects in June. The Census, in a statement accompanying the June construction data, says that if the multifamily data from the Northeast were excluded from the national picture, total permits would have increased only 0.7 percent and while total housing starts would have decreased by 4 percent in June.
The single-family numbers are more representative of the true housing market picture of continued declines, says Adam York, economic analyst for Wachovia. And the sharp increases in June data could mean large declines are in the offing for July, York says.
"Next month, we could see a real bad [total starts] number on a payback basis, maybe even sub-900,000," York says. "After that, it probably won't fall much further."
But Moody's Economy.com chief economist Mark Zandi's readings of the economic tea leaves suggest to him that there are likely to be more declines in construction activity through the end of 2008.
"Single-family construction may very well ultimately fall to a post-WWII low," Zandi says. "The current low point is 523,000 in October 1981, when fixed mortgage rates were going for 18.5 percent."
Zandi predicts total housing starts to hit bottom during the final stages of 2008, at 850,000 units. If job losses in the broader economy stabilize by the end of 2008 and house prices fall another 10 percent in 2009, then much of the excess home inventory in the market will get worked through by the end of 2010. If Zandi's assumptions hold, then he says starts will pick up in 2011, with total starts returning to a sustainable level of 1.7 million units by 2012.
"Starts won't rebound significantly until home sales revive substantially and inventory levels are significantly whittled down," Zandi says. "Permits will lead the pick-up in starts, but they will lag sales."
In the present, the fact that starts are continuing on a downward trend, while not good news to builders, is another step toward recovery and a sign builders have ramped down production, says John Burns, president of Irvine, Calif.-based John Burns Real Estate Consulting.
"Our survey [of builders] shows that most big builders are whittling down their standing inventories, while most private builders are in a stalemate with their lender about what to do next," Burns says in an e-mail to BUILDER.
The current floundering of Fannie Mae and Freddie Mac, government sponsored entities that buy and securitize mortgages, as well as broader problems in credit markets and for banks of all sizes is further impacting the housing market by hurting sales.
Fannie and Freddie are going to need to conserve cash, says Burns, which means banks will have to hold the mortgages they make, as they will have no buyer for their loans. In turn, those banks that continue lending will require higher down payments and higher interest rates due to the increased risk.
"You can kiss the down-payment assistance programs goodbye, because the mortgage default rates are much higher," Burns says via e-mail. "The smartest builders will find a partner to make the second loan (compensating them handsomely for doing so) and provide default guarantees to the lender. This will be the only way I can think of to keep [sales] volumes up."
Ethan Butterfield is senior editor for business at BUILDER magazine.
Learn more about markets featured in this article: New York, NY.