Home Building Activity Increases as Multifamily Surges

MBA (7/18/2008 ) Velz, Orawin
Housing starts unexpectedly jumped, reflecting a rush to start building activity before local building code changes took effect in New York. Total housing starts advanced 9.1 percent in June to a seasonally adjusted annualized rate of 1.066 million.
Single-family starts dropped 5.3 percent, reaching the lowest level since January 1991. Multifamily starts were up 42.5 percent as starts surged in the Northeast due to a change to New York City building codes. Last June, the city enacted a new set of construction codes effective for permits authorized as of July 1, which caused a surge in multifamily building permits in order to avoid more stringent regulations (including additional on-site water supply, fire alarm voice systems and wider stairwells).

The Commerce Department estimated starts as a ratio to the permits data and thus the rush to file for permit authorizations translated directly to a surge in housing starts. Excluding the Northeast multifamily data, housing starts fell 4.0 percent in June, the Commerce Department said. Total starts increased 102.6 percent in the Northeast and edged up 0.4 percent in the South. Starts dropped 10.5 percent in the Midwest and 8.2 percent in the West. The bulk of the jump in starts in the Northeast likely borrowed from those that would have occurred in future months and thus starts in the region should post sharp drops in the near term.

Through the first half of this year, single-family starts were 40.4 percent lower than those in the first half of 2007. By contrast, year-to-date multifamily starts were 13.7 percent higher than those last year.

While housing starts continued to trend down since their peak at the beginning of 2006, the decline has moderated over the past year. For the second quarter, total housing starts fell 13.4 percent (annualized rate), compared with a decline of at least 30 percent in each of the previous three quarters. Single-family starts drop 28.0 percent during the second quarter, also the smallest decline since the second quarter of 2007. This indicated that residential investment was a smaller drag to economic growth in the second quarter after subtracting more than one percentage point from real gross domestic product growth in each of the prior three quarters.

Total permits rose 11.6 percent in June, driven by a 73.0 percent jump in permits in the Northeast. Excluding the Northeast multifamily permits, total permits rose 0.7 percent. Single-family permits—a leading indicator for single-family housing activity—dropped 3.5 percent. This marked the 14th decline over the past 15 months. Single-family permits fell in all four regions.

Another leading indicator of housing activity released on Wednesday showed that home builders continued to be more pessimistic in July in the facing of weakening job markets, rising energy prices and declining home prices. The National Association of Home Builders/Wells Fargo Housing Market Index declined to a record low in the 22-year history of the survey.

In its July mortgage finance forecast released on July 10, the Mortgage Bankers Association projected that housing starts will trend down and hit bottom in the fourth quarter of this year at 875,000 units (seasonally adjusted annualized rate)—the second slowest quarterly pace in the history of the series. The record low was in the fourth quarter of 1981, with total starts at 873,000 units.

Stock markets rose, led by gains on better-than-expected earnings on financial stocks including JPMorgan Chase & Co. Stocks extended their rallies as crude oil futures dropped for the third consecutive day closing below $130 a barrel for the first time in more than a month. Treasuries declined and yields increased as investors turned away from their safety as risk appetite increased. The yield on the 10-year Treasury note rose five basis points and stayed around 4.06 percent by mid-Thursday afternoon, the highest rate in three weeks.