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U.S. Housing Starts: A Good Sign Of Things To Come

Written by Than Merrill

Signs that the housing market has finally turned the corner are becoming more apparent than ever. However, there is one indicator in particular that has industry experts very excited: housing starts. Recent data suggests that housing starts have reached their highest level in nearly a decade. Permits for new housing starts increased more in April than they have in the last 7-1/2 years. That said, economists remain optimistic that the housing market is showing signs of momentum after a rather disappointing first quarter.

According to a report from the Commerce Department, some of the most encouraging signs of recovery were noted in new home starts. Groundbreaking initiatives rose 20.2 percent to a seasonally adjusted annual pace of 1.14 million units. That is the highest adjusted increase since the fourth quarter of 2007, and the most significant percentage increase since as far back as 1991. The dramatic increase also forced a revision of first quarter starts. March’s starts were revised up to a 944,000-unit rate instead of the previously reported 926,000 units.

For all intents and purposes, the Commerce Department report made the future of the housing sector look more promising than it had in months.

“This report demolishes the idea that the economy — outside the oil sector — suffered some sort of real seizure in the first quarter,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to clients. “It didn’t; it was just battered badly by a winter nearly as grim as last year.”

Single-family homes, which are responsible for the largest share of starts, were the beneficiaries of the largest jump since 2008. In fact, new housing starts increased 16.7 percent across the country. It would appear as if the expansion of the economy has awarded builders the opportunity to meet demand, which has been growing for some time now. Even the once volatile multi-family market is making progress. In the last month, multi-family starts were impressive to say the least. The multi-family home segment saw an increase of 27.2 percent. Single-family permits increased 3.7 percent last month. Multi-family permits surged 20.5 percent.

Of particular importance, however, was the progress made by housing permits. The number of permits issued for future home construction increased by more than 10 percent, or 1.14 million units. At that rate, new housing permits are the highest they have been since 2008. Perhaps even more importantly, said permits have exceeded a pace of 1 million unites for the better part of a year. Conversely, interviews of trusted economists had forecast groundbreaking increasing to a 1.02 million-unit pace and permits rising to a 1.06 million-unit rate last month. In other words, things are looking better than we expected.

As recently as last month, three of the four major regions in the United States demonstrated an increased propensity towards groundbreaking numbers: with the South being the only exception. Accordingly, the South saw the pace of groundbreaking projects drop a modest 1.8 percent, whereas the other three regions all saw increases.

“That is important to note because it indicates that the winter did not mask or limit a near-term acceleration in starts in the South,” David Nice, an economist at Mesirow Financial, said in a note to clients.

As always, there are mixed opinions as to whether or not the upswing in housing starts is a sign of recovery or a monthly outlier.

“Just like the March data panicked everybody on the downside, this has probably got people too excited on the upside,” said Joshua Shapiro, chief United States economist at MFR Inc. “We are just making up for winter.”

It is worth noting that the strengthening housing market has had a positive impact on building supply stores. The world’s largest home improvement store recently adjusted their annual forecast after it reported better-than-expected sales. Not only are more homebuilders looking to supply stores, but also existing homeowners with the intent to remodel their house. While it is important not to look too far into this confidence, the signs of strength fit in with views that the housing recovery is gaining traction. Cautious optimism abounds within the housing industry, as experts hope that an acceleration in home sales and prices will combine with a tightening labor market to improve on the year thus far.