Housing Starts in August Flew Past Expectations

New home construction increased by 10.5% in August, according to the Census Bureau. Housing starts were 598,000 -- the highest since April. This surprised economists, who expected starts to decline by about 1% to 535,000. New permits also rose by 1.8%. Today's data provides mixed signals on the housing market.

First, let's look at the charts. Here's housing starts:

starts 2010-08.png

You can see that August had a nice little uptick, which added to a slight increase in starts for July. But you can also see that starts remain at an incredibly low level on a historical basis. During the height of the housing boom they exceeded 2 million. So it's a little hard to be impressed when they're only on the verge of breaking 600,000.

Permits are a slightly different story:

permits 2010-08.png

They rose to 569,000 -- by less than 2%. Permits are a leading indicator, so it's pretty surprising to see such a big uptick in starts without a similar move in permits beforehand. Presumably there was a backlog of planned homes that had already obtained permits in the past but never broke ground until August.

While it's expected that home sales increased a bit in August after July's terrible plummet, the steep rise in starts was definitely unexpected. Are developers building homes without commitments or do the few buyers out there have a preference for new homes instead of dipping into the vast inventory of existing homes?

Although today's news on starts is good for construction jobs, it's bad for overall housing market health. Prices would be better off if buyers were to focus on the large number of existing homes currently available instead of building new ones. For each new home sold one more existing home remains in housing inventory.

This point is particularly relevant for those regions hit hardest by housing's collapse when the bubble burst. In August, starts in the west and south rose by 34% and 7%, respectively. Those regions definitely don't need new homes making it harder to reduce their existing inventory, though there's little doubt that they could use the construction jobs.