Housing starts, driven by a surge in multifamily construction in the South, rose 1.6% in March to a seasonally adjusted annual rate of 626,000, 20.2% ahead of the same month last year, the Commerce Department reported Friday. Single-family starts fell 0.9% to at rate of 531,000, still 47.1% ahead of March 2009 and compared to a February estimate that was revised upward to a 5.7% gain from the previously reported drop of 0.6%.
Permits were up all around, with an overall gain of 7.5% to an adjusted annual rate of 685,000 and a 5.6% rise in single-family to a rate of 543,000. The overall gain put permits 34.1% ahead and single-family up 50.8% from March, 2009.
The increase in starts was driven by a 39.7% increase in construction of structures with five units or more to a rate of 88,000. That was off 31.8% from March last year. Based on the permit data, that activity will slow considerably as permits for that category were up 13.2% to a rate of 120,000.
Regionally, the gain in starts was almost totally due to activity in the South, by far the largest region in the Commerce Department report. It posted an 18.2% increase overall and a 9.9% increase in single family starts, 23% and 47.7%, respectively, ahead of the same month last year. The rate for starts in the South was 337,000, more than twice that of the next biggest region, the West, which was running at a rate of 140,000 in March. Elsewhere, the Northeast was down 8.3% overall but up 5.6% for single-family; the Midwest down 28.4% and down 33.7%, respectively, and the West down 2.1% but up 0.9% for single-family. Compared to March 2009, the Northeast was down 4.3% overall but up 29.5% for single-family, the Midwest was down 15.3% but up 19%, respectively, and the west was up 75% and 82.8% respectively.
The data for permits was similarly skewed by the South, which was up 18.4% overall and up 14.7% for single-family and up 35.3% and 44.5%, respectively, from March, 2009. The Northeast was down 19.5% overall and down 23.1% for single-family, but the region was 17.9% ahead of the same month last year overall and up 42.9% for single family. The Midwest was up 17.6% overall and 8.3% for single-family, up 44.6% and 56.9% from last year, respectively. The West was down 6.7% overall and flat in single-family but was still up 31.1% and 68.7% from March of last year.
Housing completions were down 3.1% from February to an adjusted annual rate of 656,000 overall but up 5.9% to a rate of 486,000 for single-family. Homes under construction for the month were down -1.4% overall to a rate of 489,000, but single-family was up 0.7% to a rate of 305,000.
Analyst views of the data were mixed.
Wells Fargo home building analyst Carl Reichardt said in a research note that "single-family starts have only shown modest increases sequentially, in just two out of the last four months (January and February), the timeframe we believe a home must be started to be eligible to make the April 30 federal tax credit contract deadline. While yesterday's sales data in the HMI was the highest seen in the last two years, we believe the one-point increase in builder sentiment regarding future sales conditions (24 to 25) supports our belief that starts and permit activity will likely fall off some after the federal tax credit for homeownership expires (order by April 30, close by June 30)."
A more positive view was taken by J.P. Morgan's Michael Rehaut, who wrote, "We believe this data continues to point to stabilization and slowly reemerging demand, as starts and permits have moved upward since 1Q09 in a consistent but moderate fashion. Amid this environment, we believe the builders are well positioned to demonstrate positive order growth momentum during the upcoming year, improvement in core operating margins and less impairment charges, and hence we reiterate our positive sector stance."
Separately, several of the investment houses were out with their spring reports on the public builder sector in advance of earnings season, which kicks off with Standard Pacific on Monday.
Raymond James' Buck Horne and his team were out with a downgrade to neutral of the builder sector and a relatively dark view of market conditions ahead. The James Spring Housing Quarterly report, which was prepared prior to the release of the March starts and permits data, predicted a slowdown in new home sales by summer that would persist. "Once we move past this summer's likely demand dip, we believe the annualized pace of new home sales and starts will again begin to move higher heading into 2011. However, we still estimate it could be three years until these housing indicators approach their longer-term trendline averages," the report said.
It continued, "This longer-term thesiscontinues to be driven by four overriding headwinds, which, unfortunately, we believe will greatlylimit the slope of recovery this cycle, including: 1) significant excess vacant inventory, 2) a negativedemographic shift as the growth of downsizing 65+ households outstrips potential first-time buyers,3) unsustainable levels of government support, and 4) pervasive negative equity. Accordingly, wecontinue to believe any housing recovery from here will be slow, volume-based in nature, andpunctuated by the conspicuous absence of meaningful home price appreciation for years."
Among the companies it covers, James downgraded shares of Ryland and Lennar to "market perform" from "outperform" and took MDC Holdings to "outperform" from "strong buy," also reducing the target price of the latter to $39 from $45. It maintained its "outperform" rating on KB Home but dropped Standard Pacific to "underperform," citing the company's continuing leveraged balance sheet.
Still, the James analysts noted that its "near-term caution is not meant to send investors running from the sector. We find current valuations only slightly above normal historical medians."
J.P. Morgan's Rehaut was far more upbeat. "While the larger-cap builders are still up 21% YTD on average (S&P: +9%), the group has pulled back 3% since March 26th (S&P: +4%). We believe this is largely due to some disappointment surrounding the Spring selling season not being as robust as some had hoped. However, while not robust, we continue to believe the Spring has been solid so far, with orders ranging from 5% to 18% for KBH, LEN, and MTH, despite commentary pointing to a lower than expected impact from the tax credit, set to expire on April 30th."
Rehaut is looking for order growth averaging 23% from the six builders scheduled to report during the next two weeks to average 23%, above the 10% average of the 3 builders that reported over the past month. He also expects that the less-than-anticipated effect of the tax credit this year will set up a positive comparison as the year wears on, a "potential positive surprise for the group as a more stable but positive demand pattern emerges for the rest of 2010."