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Overall
construction spending posted an unexpected gain of 0.4 percent in August after tumbling during July to the lowest level in a decade. The entire August advance occurred in the public sector, thanks to government stimulus outlays for public works. By contrast, spending among all private categories -- especially non-residential -- retreated in August.
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Repeating a pattern seen in July, the number of total
housing starts rose by 10.5 percent in August despite a decline in the value of private construction put in place. Even so, starts remained near the lowest levels since the Census Bureau began collecting data in 1959; also, the increase was concentrated in the multi-family sector.
"While the volatile multi-family sector was responsible for the overall level of starts in August being higher than expected, the more important single-family component remains severely depressed," noted
Joshua Shapiro, chief economist of MFR Inc.
Nor is the market providing signals of a dramatic improvement. Although total permits rose 2.1 percent, permits for single-family structures -- which accounts for 75 percent of the housing market -- fell by 0.7 percent. "This marks the fifth consecutive monthly drop [for single-family permits] and is indicative of deterioration in demand for new homes," economist Michelle Meyer of Bank of America/Merrill Lynch said. "Even though single-family starts moved in the right direction, there is still weakness evident in the single-family data," added
Daniel Silver, an economist at JPMorgan Chase. "The level of starts relative to permits indicates growth in housing starts may not be sustained."
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Even if starts do retreat further, we think that fall-off will be fairly modest and short-lived. It appears that 500,000 starts marks the “baseline” level of nationwide building activity. "The housing market has found a bottom, and we're bouncing along here," concurred Thomas Simons, an economist at Jefferies Group Inc. Simons warned, however, that "the market is challenged by supply, and until that is cleared out, it will be tough for the homebuilders."
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Because of flat
new-home sales (matching the second-lowest level on record), the ratio of starts to sales remained elevated in August. Granted, this ratio is something of an apples-to-oranges comparison, since starts include all activity while sales include only houses built on a speculative basis (i.e., excluding homes built on contract). Nevertheless, it gives an indication of the balance (or lack of same) between supply and demand.
"There is no upside momentum in housing, period," said
Eric Green, chief market economist at TD Securities Inc. "Unemployment is so high, consumer confidence is so low, household wealth is eroded and the psychology remains negative."
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A comparison between completions and sales tells much the same story. Interestingly, however, the number of single-family dwellings for sale and months of inventory dropped slightly despite a rise in completions -- mainly in the multi-family sector.
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August’s 7.6 percent increase in sales of
existing homes recouped a bit of July’s 27.2 percent plunge, and helped to whittle away at both months of inventory and the absolute number of existing homes. Nonetheless, the residual effects of the federal home buyers’ tax refund remain very evident in the resale market. “We should have relatively low expectations of what the housing sector should be able to achieve over the next few years,” opined
Zach Pandl, an economist at Nomura Securities International. “You have too many homes and too many mortgages and it’s going to take a long time to work through that overhang.”
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The median new home price dropped by 0.6 percent in August, to the lowest levels (on a nominal basis) since January 2004. Price erosion was even greater for resales (-1.9 percent), which resulted in greater affordability for a second consecutive month.
Strangely, although the seasonally adjusted
S&P/Case-Shiller home price indices rose in only three metropolitan statistical areas (MSA) between June and July, the 10-city composite index somehow managed to eke out an increase.
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“Home prices crept forward in July. Ten of the 20 cities saw year-over-year gains and only one -- Las Vegas -- made a new bottom, as the impact of the home buyer program continued to fade away,” said David Blitzer, Chairman of the Index Committee at Standard & Poor’s. “The year-over-year growth rates for 16 of the cities and both Composites weakened in July compared to June…. The next few months may give us an idea of the true strength of the housing market, as the temporary economic stimuli will have ended. Housing starts, sales and inventory data reported for August do not show signs of a robust market, and foreclosures continue.”
Blitzer’s contention of annual price increases is disputed by the Federal Housing Finance Agency (FHFA).
FHFA reports that home prices dropped 3.3 percent in July from a year earlier. Our research into similar past disparities between these two sources revealed that different sampling techniques explain the opposing results.
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