Housing Starts and Permits Rise, but Remain Very Low

By Daniel Indiviglio

Although each forward-looking indicator increased in May, their growth was driven primarily by new multi-family structure construction

600 housing starts REUTERS Kevin Lamarque.jpg

New home building will likely remain weak throughout the summer, which isn't good news for millions of unemployed construction workers. Housing starts and new permits, two forward-looking indicators for the market, each rose a little last month, but remained in the range that we've seen over the past year. Excess housing inventory continues to prevent the need for new homes to be built.

Here's the chart for new permits, from the Census Bureau data:

permits 2011-05.png

So you can see a small uptick in May. Permits rose 8.7% to the highest level all year. Yet the vast majority of the increase was not due to new single-family homes being built, but new multi-family dwellings. This indicates that more investors are creating apartments for rent, instead of additional consumer demand requiring new homes for purchase. Without the bump from multi-family, permits would have been approximately flat last month.

We see something similar with housing starts, which indicate when new ground has been broken on a home:

starts 2011-05.png

Here, there was a smaller 3.5% increase that failed to eclipse March's number. But again, like we saw with permits, multi-family dwellings made up most of the increase.

As home prices continue to decline, we'll likely see new construction remain at its current very low levels. When there are great deals to be had on existing homes, it's hard to entice consumers to buy a new home, which might not fetch as deep of a discount. Since defaults remain high and sales remain weak, there's also a lot of inventory to work through before prices will stabilize.

Ultimately, it's a good thing that consumers are focusing their purchases on the glut of existing homes on the market instead of building new houses. That way, consumers will soak up the homes already built quicker and the market can stabilize sooner. Unfortunately, this process will likely take quite a while, even without new homes being aggressively pursued.

Image Credit: REUTERS/Kevin Lamarque

This article available online at:

http://www.theatlantic.com/business/archive/2011/06/housing-starts-and-permits-rise-but-remain-very-low/240550/