Merk Investments: Housing Starts

The April report on housing starts moved back above the1.0mln level to 1.032ln for the month in line with its three-month average of 1.031mln. The primary impetus for the unexpected increase in the month over month series was a net 90K increase in starts of multi-family units to 340K. Starts of single-family residences declined to 692k.  Demand for permits rose to 978K, with both SFR’s and MFD’s both seeing increases to 646K and 332K respectively. On a regional basis starts were up 24.4% in the Midwest, 18.5% in the West and 3.6% in the South. Only the Northeast saw a fall in starts to the tune of -12.7%.

On first glance the April data could be construed to be one of the first positive developments in housing sector in some time. Yet, within the series, there is a bit more than meets the eye. The real positive note that should be taken from the series is not the above market expectation increase in both starts and permits, but the continued reduction in starts for single-family residences. Why would the weakest month in the start series since 1991be good? Mostly, because there is still a11 backlog of new homes sitting on the market that is well above anything resembling stable equilibrium levels.  For the market to reach anything that looks relatively stable, we would need to see several more months of contraction in the SFR portion of the starts category.

However, what caught my eye in the report was the fact that there does appear to be a move back into building condo’s and townhouse’s in some areas of the country that still have major problems with backlogs. This is not a positive development and does again cause reason for concern. In particular, in areas of the country such as the South, were there is an extraordinary inventory of condos and townhouses, an increase in starts and permits is a particularly negative development.  We would urge our clients to look past the headline increase, which is a function of a very volatile multi-family dwelling, and focus on the continuing decline in starts for single-family residences. In the aftermath of today’s report we are fairly certain that there will be calls for a bottom in the market. Any such claims should be taken with more than a grain of salt and we fell are very premature.

Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy

This report was prepared by Merk Investments LLC, and reflects the current opinion of the author.  It is based upon sources and data believed to be accurate and reliable.  Opinions and forward looking statements expressed are subject to change without notice.  This information does not constitute a solicitation or an offer to buy or sell any investment product, nor provide investment advice. Merk Investments does not own any of the stocks mentioned; this is not an offer to buy or sell any security mentioned.