Housing Production Modest Growth

May housing starts rose 6.8% as apartment construction rebounded from an unusually low April and single-family construction remained virtually even. Total starts at a 914,000 seasonally-adjusted annual rate (SAAR) have been above 900,000 for three of the last five months.

 
Regionally, the South was the only region with an increase in single-family starts (12.2%) while the Northeast dropped 20%, the Midwest dropped 15% and the West dropped 4%. Issued but unused single-family permits were up by double-digit percentages in all three of the regions with a drop in starts. Stock piling permits along with above average precipitation in those same regions suggests single-family starts were held back by wet weather.

 
Total permits were down 3.7% but also due to an out-of-bounds April figure for apartment buildings and a more normal rate of 352,000 permits (SAAR) for May. Single-family permits increased by 1.3% to 622,000 (SAAR), the highest since May 2008. No region experienced a decline.

 
The May housing construction report provides evidence that the housing market continues its modest growth path toward recovery as buyers trickle back into the market and builders deal with an industry reassembling itself after a seven year hiatus.

Apartment Production Spikes to an Unsustainable Rate

The Census Bureau’s preliminary estimate for starts in buildings with five or more apartments in March came in at a massive (seasonally adjusted annual) rate of 392,000 units.  In the Census construction report, this shows up as a 27 percent increase over February.  However, the number for February was itself revised upward by 24,000—so the five-plus starts rate for March is actually 38 percent higher than the production rate we thought prevailed a month ago.

At 392,000, the five-plus starts rate is the highest it’s been since January of 2006 (a one-month anomaly that at the time was explainable as the industry’s response to changing building codes in some states).  Even if we smooth some of the volatility out of the five-plus starts series, the 3-month moving average is up to 325,000.  That’s above the annual number of five-plus starts in any year since the 1980s, so even the current moving average seems a bit too high to sustain going forward—a contention supported by the permit numbers in the latest construction report.

The report shows that, in March, the (seasonally adjusted annual) rate at which new five-plus permits were issued dropped 8 percent to 283,000, while the number of five-plus permits waiting in the pipeline (previously issued but not yet converted to starts at the end of the month) declined 19 percent, to 38,400 (not seasonally adjusted).

Housing Passes One Million Mark

Housing construction passed the psychological mark of one million starts in March coming in at 1.036 million homes, up 7 percent from an upwardly revised February level of 968,000. The surge was due to a 31 percent increase in apartment construction to a level of 417,000 units, the highest since January 2006. Single-family construction fell 4.8 percent to 619,000 from an upwardly revised February level, which was the highest since May 2008. The first quarter single-family average was 628,000 up 6 percent from the fourth quarter 2012.

 
Housing permits were down 3.9 percent but from a February high not seen since July 2008. The first quarter average was 915,000 up 2.6 percent from the fourth quarter. Builders were stock pilling permits in February and the inventory of unused permits dropped 9 percent in March as a replacement for drawing more permits. Single-family permits were virtually unchanged so the change was due to a 10 percent drop in apartment permits likely because we are approaching the sustainable level of apartment construction.

 
Regionally, starts were up in all regions except the Northeast, which was down 5.8 percent monthly but up 12.6 percent annually. Midwest starts were up 9.6 percent month-to-month and 28.4 percent from March 2012. The South was up 10.9 percent monthly and 58.2 percent annually and the West was up 2.7 percent monthly and 53.7 percent annually.

The mixed results were in line with NAHB expectations for 975,000 starts in 2013 or a 25 percent improvement over 2012.

Multifamily Starts: A Little Stronger than We Thought Last Month

For February of 2013, the Census Bureau’s preliminary estimate for starts in buildings with five or more apartments came in at 285,000  (at a seasonally adjusted annual rate).  In the Census construction report, this shows up as less than a 1 percent increase from January, but the January number itself was revised upward by nearly 9 percent—so 285,000 is  actually 9.6 percent higher than the preliminary starts rate for January originally reported in last month’s blog.

Although well below the anomalous spike of December, the February 2013 five-plus starts rate appears strong compared to any other month from recent history (the same general pattern seen in total housing starts).

Another interesting statistic in the February 2013 construction report was the (seasonally adjusted annual) rate at which new five-plus permits were issued during the month.  The new five-plus permit rate increased  7.5 percent to 316,000—which at first may not seem terribly dramatic, but is up nearly 55 percent year-over-year and the highest the five-plus permit rate has been since July of 2008.

The number of unused previously issued five-plus permits remaining in the pipeline at the end of the month also remained relatively healthy at 47,700 (not seasonally adjusted)—up 2.7 percent from January and 46.4 percent year-over-year.  Overall, the permit numbers have been strong enough to support a five-plus starts rate as high as February’s 285,000 over the next couple of months.

Multifamily Production Falls Back to November Rate

The Census Bureau’s preliminary estimate of starts in buildings with five or more apartments for January came in at 260,000 (at a seasonally adjusted  annual rate).  As predicted in last month’s post, a rate well in excess of 300,000 proved too high to sustain.  In fact, the five-plus starts rate for December was revised upward, from 330,000 to 352,000—so the preliminary estimate for January shows up as a 26 percent decline, dropping the five-plus starts rate back to where it was in November.  Month to month fluctuations on this order of magnitude are not unusual in the multifamily construction series, however.

On a year-over-year basis, five-plus starts were still up 35 percent, reflecting the generally upward trend in multifamily production that has prevailed since the end of 2010.

Meanwhile, the rate at which new five-plus permits were issued remained relatively stable in January, increasing 1 percent to 311,000—the third straight month the five-plus permit rate has been slightly above 300,000.  The rate of new five-plus permits usually runs a little above the rate of new five-plus starts (partly because of the Census Bureau’s tendency to reclassify some units considered multifamily by local permitting offices as single-family attached).  Nevertheless, the five-plus permit numbers in recent construction reports have been strong enough to suggest that a five-plus starts rate at slightly above 260,000 is sustainable over the short run.

Housing Permits Continue Rise

The US Census Bureau and Department of Housing and Urban Development housing construction report for January contains mixed but mostly positive results. Housing permits continued their steady increase to a new high not seen since mid-2008. Total permit activity was up 1.8% and the rise was evenly spread across single-family, up 1.9% and multifamily, up 1.5%.

 
Total housing starts were down 8.5% but the loss was all in multifamily construction where the annualized rate of construction dropped from an unusually high 365,000 in December to a more steady 277,000 in January. The downward adjustment in multifamily was expected since the December figure was out of line with the trend running at 250,000 annualized rate. Single-family starts were virtually unchanged at 613,000 an annualized rate, up 0.8% from December.

 
Regional results were also mixed and generally more positive when the more reliable permit data are viewed. The South and West saw increases in starts of 4.1% and 16.7% respectively, the highest since spring 2008, and both single-family and multifamily improved. The Northeast and Midwest fell 35.3% and 50% respectively but most of that decline was in multifamily. Regional permit trends were more even with three regions advancing that only the West down 0.5%.

 
Except for the realignment in rental apartment building, the January report conforms to NAHB expectations for continued modest improvement in housing construction. Single-family permits are at their highest level since June 2008 and the incline has been mostly steady since early 2011. Permits activity has risen by 200,000 since that trough, although total permit activity still remains below half of a normal year’s output. NAHB expects to see continued modest improvement throughout 2013 ending the year at an average total starts rate of 979,000.

Multifamily Production Rate Hits 4.5-Year High

In December, the (seasonally adjusted) annual rate of starts in buildings with five or more apartments increased by 23 percent from the revised figure for November, to 330,000.  The November figure was revised down substantially, but the big news is that the rate of multifamily production continues to climb, even after the large improvements it made in September and October of 2012—to the point where, at 330,000, the five-plus starts rate is now up 115 percent year-over-year.  Historically, this also marks the first time the monthly five-plus rate has been over 300,000 since June of 2008, shortly before the housing downturn hit the multifamily industry.

Meanwhile, the rate at which new five-plus permits were issued in November declined by 1 percent to 301,000, while the backlog of unused permits in the pipeline increased by roughly 6 percent, to 46,800 (not seasonally adjusted).  Overall, the December permit numbers were strong enough to indicate that the five-plus starts rate is likely to remain relatively healthy in the short run, although a rate as high as 330,000 may be a little too much to sustain.

Apartment Production Stable at 4-Year High

In November, the (seasonally adjusted) annual rate of starts in buildings with five or more apartments was 285,000, according to the latest  release from the Census Bureau’s Manufacturing and Construction Division.   In the release this shows up as a 4,000 increase from October, but the five-plus starts rate for October was revised downward by 4,000; so the preliminary rate for November is exactly the same as the rate initially reported for October a month ago.  Irrespective of any revision, the five-plus starts rate has been relatively stable and over 280,000 for two consecutive months now—the highest this measure of apartment production has been since July of 2008.

Although not as high as annual production during what many consider the “golden age” for multifamily housing (roughly 1997 through 2006), a five-plus starts rate of 285,000 is high enough to rank as one of the weaker golden-age months.

Meanwhile, the rate at which new five-plus permits were issued in November increased by 10 percent—largely offsetting the previous month’s decline and taking the five-plus permit rate back up over 300,000.  The backlog of unused, previously issued five-plus permits in the pipeline was also relatively stable in November, at 44,000 (not seasonally adjusted).  On balance, the November permit numbers indicate that, subject to the normal monthly fluctuations, a five-plus starts rate in the neighborhood of 280,000 is likely to be sustainable over the short run.

Housing Production Takes a Breather

Housing starts fell 3% in November but from an elevated level in September and October. Single-family starts declined 4.1% also adjusting from what may have been a momentary surge in September and October as builders try to restock very low inventory levels. The interpretation is further supported by a 3.6% rise in permits, an indicator of future construction activity.

 
The first two months of the fourth quarter have averaged 875,000 starts up 13% from 774,000 in the third quarter. Single-family construction is up 6% and multifamily up 30% last two months compared to third quarter.

 
The mix between single-family and apartment construction was also uneven. Multifamily apartment construction continued on the rise with units in buildings with 2 or more homes rising to 296,000 on a seasonally-adjusted annual basis. And, permits for the same category rose to 334,000 or 10.6% above their October level. The demand for rental apartments has and will continue to support increases in this sector.

 
Single-family starts were mixed across regions rising in three regions but falling in the West. The east coast Sandy storm did not appear to affect total starts in the region, which fell 4,000 while US starts were down 27,000 (both on a SAAR basis).

 
The mixed results of single-family starts down but single-family permits virtually level support the conclusion of a pause rather than any suggestion of softness. Many hurdles remain, including access to credit, poor appraisals and competition with distress sales but the most likely path continues to be modest growth supported by low mortgage rates and a slowly recovering labor market.

Confidence in Multifamily Production Mostly Up in the Third Quarter, with Some Weakness in Low-Rent

The Multifamily Production Index (MPI), released by the National Association of Home Builders (NAHB), remained fairly steady in the third quarter of 2012 at 52—the third straight quarter the index has been over 50.

The MPI measures builder and developer sentiment about conditions for apartment and condominium construction, and is are scaled so that any number over 50 means more builders and developers report conditions are improving than report conditions are getting worse.  When conditions are changing, the MPI generally turns before the data on actual construction.

The MPI is built from three components, capturing sentiment about the construction of low-rent apartments, market-rate rental apartments and “for-sale” units, or condominiums. In the third quarter, the MPI component tracking sentiment about market-rate rental production increased from 63 to 69, and has now been over 60 for five consecutive quarters—the longest sustained period of strength since the inception of the index in 2003. The component tracking sentiment on condo production increased from 41 to 44—the highest reading since the fourth quarter of 2005.  In contrast, sentiment on low-rent apartment production dropped 15 points to 46.

The weakness in the low-rent component of the MPI was likely due to a specific provision of the Low-Income Housing Tax Credit that is set to expire at the end of the year.  The prospect of dealing with this has been making lower-rent projects difficult to underwrite.

For complete history of the MPI and its components, see the web page for NAHB’s Multifamily Production & Vacancy Indices.