Wednesday, May 20, 2015

Housing's 'New Normal' .... Year to Date Starts are 7.6% Stronger Than Last Year But 44% Lower Than the 2007 Peak Year

The U.S. economy is recovering, albeit slowly, from its mult-year recession. That's a sign that better days lie ahead. How far ahead, and how much better those days will be, those are the relevant questions to ask.

In my view, we are best advised not to believe that the various small signals of economic improvement offer solid proof that what we used to refer to as a normal economy is coming anytime soon. Times have changed and the new normal is upon us. We'll take housing as an example of what we mean by the 'new normal.'

First, let's consider the good news. Yesterday we learned that housing starts for the month of April were up 20% from last year. For the first four months taken as a whole, they've increased a solid if unspectacular 7.6%.

Now let's look at this through our new normal lens. Despite this improvement, new home starts were still 44% lower than they were in 2007. That's the bad news.

The lower 'new normal' is here to stay, it seems.

Home Building Surges to Best Pace Since 2007 has the good news/bad news story:

"U.S. home building surged in April to the highest level since before the recession officially began, a sign of thaw in the housing market during the crucial spring selling season.

U.S. housing starts rose 20.2% from a month earlier to a seasonally adjusted annual rate of 1.135 million in April, the Commerce Department said Tuesday. That was the highest reading since November 2007, and the biggest percentage increase since February 1991. New applications for building permits, a bellwether for construction in coming months, increased 10.1%. . . .

The increased activity was broad-based. Starts on single-family units, which exclude apartments and represent almost two-thirds of the market, climbed 16.7%, the most since January 2008. Multifamily units, including apartments and condominiums, rose 27.2%. . . .

Construction levels for new homes have been historically low during the recovery, though the latest figures suggest firming demand. . . .

From a year earlier, housing starts were up 9.2% in April while permits rose 6.4%.

Although housing data has been volatile over the past several months, the latest figures are looking up. A forward-looking gauge of U.S. home purchases rose for the third straight month in March, the National Association of Realtors said last month. A separate report from the industry group showed sales of previously owned homes rose to the highest level in 18 months in March.

But U.S. home builders appear less optimistic this month. The National Association of Home Builders’ confidence index fell for the fourth time in five months, to a reading of 54 in May, the group said Monday. A reading above 50 means most builders generally hold a favorable views of the market for newly built, single-family homes.

From a broader perspective, housing starts are off to a steady but not spectacular start to 2015. Construction starts for single-family homes for the first four months of the year totaled 209,400, which is up 7.6% from the same period last year but still nearly 44% less than the same period in the headier market of 2007. John Johnson, chief executive of David Weekley Homes, a closely held builder operating in 12 states, says the moderate, year-to-date pace is a good reflection of what he’s seeing.

Weekley’s construction starts were up 10% in April from a year earlier. Mr. Johnson said the Houston-based builder’s sales have improved in each month so far this year.

“I think it’s that people feel comfortable about buying,” said Mr. Johnson, whose company sold 3,000 homes last year. “It’s just a good, steady market—about what we expected.”"

Summing Up

The new normal is a fixture of this slow going and debt ridden U.S. economy. We can anticipate that new home construction will remain below the 2007 peak for many years to come.

A substantial part of the reason for the lower than historical new home starts is that 50% of U.S. college graduates require continuing financial support from their parents. See Half of college graduates expect to be supported by their families.

Thus, for many new adults, home ownership, marriage and families will have to wait, as student debt, other burdensome debt levels and few high paying jobs are facts of life in this new normal slow growth economy.

So while it's nice to see a rebound in housing starts for the month of April, let's not get carried away.

That's my take.

Thanks. Bob.

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