Archive | September, 2012

Indicator 5 – Housing

29 Sep

Housing Starts (Formally Known as “New Residential Construction”)

Since people need jobs in order to buy homes, our last indicator – employment – has a significant impact on our fifth economic indicator – housing starts (an approximation of the number of housing units on which some construction was performed during the month).  At 8.2%, the unemployment rate is almost a full percentage point lower than it was a year and a half ago. Two problems though: First, that number is still high. Second, it has stopped declining as the rate of job creation has slowed to a crawl.

The associated income numbers are even worse: The inflation-adjusted median wage fell 2% in 2011 to $50,054, after ticking down 0.5% in 2010.  The data so far for 2012 show wages are flat, which isn’t exactly cause for celebration.

So back to housing starts: Data is provided for single-family homes and multiple unit buildings. The data indicates how many homes were issued building permits, how many housing construction projects were initiated and how many home construction projects were completed.  The U.S. Census Bureau and the Department of Housing and Urban Development jointly released the following new residential construction statistics for August 2012:


Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 803,000. This is 1.0% below the revised July rate of 811,000, but is 24.5% above the August 2011 estimate of 645,000.  Single-family authorizations in August were at a rate of 512,000; this is 0.2% above the revised July figure of 511,000.  Authorizations of units in buildings with five units or more were at a rate of 263,000 in August 2012.


Privately-owned housing starts in August were at a seasonally adjusted annual rate of 750,000. This is 2.3% above the revised July estimate of 733,000 and is 29.1% above the August 2011 rate of 581,000.

Single-family housing starts in August were at a rate of 535,000; this is 5.5% above the revised July figure of 507,000. The August 2012 rate for units in buildings with five units or more was 208,000.


Privately-owned housing completions in August were at a seasonally adjusted annual rate of 689,000. This is 0.7% above the revised July estimate of 684,000 and is 11.7% above the August 2011 rate of 617,000.  Single-family housing completions in August were at a rate of 489,000; this is 5.4% above the revised July rate of 464,000.  The August 2012 rate for units in buildings with five units or more was 193,000.

Although this indicator is highly volatile, it represents about 4% of annual GDP, and can signal changes in the economy and the effects of current financial conditions.  Analysts and economists know to watch for longer-term trends in housing starts.  But this single indicator doesn’t tell the whole housing story.

According to the closely watched S&P/Case-Shiller national home price index, which covers more than 80% of the housing market in the United States, the typical home price in July 2012 rose 1.6% compared to the previous month.

It marked the third straight month that prices in all 20 major markets followed by the index improved, and it would have been the fourth straight month of improvement across the full spectrum if not for a slight decline in Detroit in April.  The index was up 1.2% compared to a year earlier, an improvement from the year-over-year change reported for June.  While home prices have been showing a sequential change in recent months, it wasn’t until June that prices were higher than a year earlier.

The July 2012 reading matched levels last seen in the summer of 2003, when the market was marching toward its peak in 2006.  The collapse of the market after that led to the financial crisis of 2008.

But I’m not so sure the housing market is on its way back to health.  Despite the third monthly increase in home prices, there are still more than 10 million properties with underwater mortgages, and a shadow inventory of 1.5 million, or a four month supply.  Negative equity will continue to take its toll on consumption, while the shadow inventory, worth about $246 billion, will constrict lending and probably affect banks’ earnings.  Shadow inventory refers to real estate properties that owners (or banks) are delaying putting on the market until prices improve.  Shadow inventory can create uncertainty about the best time to sell (for owners) and when a local market can expect full recovery.   Also, shadow inventory typically causes reported data on housing inventory to understate the actual number of inventory in the market.

So, even if a small fraction of these borrowers were to default on their mortgages in the near future, either because of negative shocks to borrowers’ ability to pay or due to strategic defaults, it could result in another sharp decline in home prices and impede the ongoing recovery in the housing market.  Out of those 10 million mortgages that are underwater, about 3 million remain “severely underwater,” which means the initial loan-to-value ratio (LTV) is 125% or more (in other words, the value of the mortgage is at least 25% higher than that of the property).  While seriously delinquent mortgages (at least 60 days) have declined, the percentage of loans in foreclosure has remained stubbornly high, at about 10% of underwater mortgages.

According to CoreLogic, the shadow inventory stood at 1.5 million in April, which translates to 4 months of supply.  After having peaked at 2.1 million in 2010, the shadow inventory has declined, but still remains elevated; its total dollar volume is $246 billion.  This means firms holding these assets on their balance sheets, like JPMorgan Chase, Bank of America and Citigroup, will continue to see pressure on their profitability.  Homebuilders like KB Home and Lennar, though, have managed to outperform markets, despite the shadow inventory.

Unless you live in the greater Washington D.C. area where construction is booming like its 2005, I believe it is too early to call it a housing recovery.  Only when foreclosures and shadow inventory have been worked out of the system, negative equity is cleared away and prices have stabilized will the housing market have recovered – albeit not necessarily to its 2006 peak.