Economic Insanity? Housing Starts Rise But We Need Them To Fall

At last month’s sales pace, it would take 13.3 months to sell all the new homes currently in inventory. This is by far an all-time record. So what happens? New housing starts jumped in February 22.2% to a seasonally adjusted annual rate (SAAR) of 583,000 from the 477,000 pace of January.

While this is still down significantly (-47.3%) from the year-ago pace of 1,107,000 it is nothing short of economic insanity. The last thing the housing market needs right now is new supply. These numbers will help the look of the first quarter GDP, since the residential investment component will be much larger than anyone expected. However, this is, quite frankly, an unmitigated disaster in terms of the long-term health of the economy.

We need for housing starts to be falling, not rising. It’s not that I want to see unemployed construction workers - I don’t. But if we are going to see the housing markets stabilize, we need to get the inventories under control.

Interestingly though, most of the rise was in apartments, not single-family structures. Single-family starts rose just 1.1% to a seasonally adjusted pace of 357,000 from January’s pace of 353,000. This was less than half the year-ago level of 722,000. Thus most of the rise was in new apartment and condo complexes? What are these developers thinking?

The rise in starts was widespread, with 3 of the 4 census regions seeing major increases. The Northeast posted a stunning 88.5% rise in overall starts, but was still running 48.8% behind a year ago, even with the spectacular rise for the month. The Midwest followed with a 58.5% rise for the month, which was still 45.5% below last year. The South also had a strong month, rising 30.2% — it is now running 42.5% below year ago levels.  The West was the only region where starts remained depressed, falling 24.6% for the month and leaving the pace 59.1% lower than a year ago.

The permits numbers were a muted version of the starts numbers. Nationwide, building permits rose 3.0%, largely due to a big 27.6% pop in the Northeast, and was helped by a 5.9% rise in the South. The Midwest was unchanged. Out West, permits fell 13.6%. On a year over year basis, permits are down 44.2% nationwide, with the regions raging from a 29.5% decline in the Northeast to a 57.9% decline in the West. Nationwide, single family permits rose 11.0% for the month but are down 42.3% year over year.

While this might cause a short-term pop in the shares of the Homebuilders like D.R. Horton (NYSE:DHI) and Ryland (NYSE:RYL), I do not think this is the start of a sustainable turnaround in the housing market. Now, if next week, when the new housing sales numbers come out and show a similar pop, then it will be time for celebration. Simply adding to the pile of houses waiting to be sold is a reason for worry, not celebration.

This means that the decline in housing prices might well be deeper and more protracted than it might otherwise have been. This will cause further damage to the balance sheets of both the consumers, and of the major mortgage lenders like Bank of America (NYSE:BAC), Fifth Third Bank (NASDAQ:FITB) and Comerica (NYSE:CMA).

Just remember the mantra: More new home sales - good; more new housing starts - bad. The first graph below (larger versions available at http://www.calculatedriskblog.com/) shows how this hosing downturn has been steeper than any we have seen before. Yet it has to been seen in conjunction with the second graph showing the inventory overhang. Yes, a rebound in housing starts tends to lead us out of recessions, but that has to be accompanied by a reduction in housing inventories.

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