June 26, 2012
May U.S. new home starts declined but revisions and permits were encouraging
The latest month’s level of starts was -4.8% compared with April 2012, but +28.5% versus May of last year.
Through the first five months of this year, the average level of monthly starts (719,000 units) has been higher by slightly more than a quarter (+26.0%) versus the same January to May period of 2011.
The month-to-month decline in starts in May could easily be taken as one more indicator of an economy that’s slowing, alongside a that continues to underperform (only +69,000 net new jobs in May) and that have fallen for two months in a row.
But there are some underlying shifts in home starts that indicate a more positive trend than appears on the surface.
One place to begin a deeper analysis is with the revisions to previous data.
For example, March new home starts were originally reported as 654,000 units. That figure now appears in the May report as 706,000 units.
That’s a sizable jump (+52,000).
Similarly, April was first recorded as 717,000 units. But the new figure for April as appearing in the May report is 744,000 units.
That’s another significant upward adjustment, +27,000.
April has now become the highest level for U.S. home starts since October, 2008. In other words, one has to go back three-and-a-half years to find a level of American home starts as high as in the first month of spring this year.
The fact that previous monthly home starts are undergoing strong upward revisions is an encouraging indicator.
Major revisions are most common when there is a turning point in the cycle. Data collection procedures and some automatic estimating formulas tend to lag real market conditions.
The latest report contained another spoonful of good medicine. Residential building permits in May were a seasonally adjusted and annualized 780,000 units.
Permits are approaching the 800,000-unit benchmark. Once they break through that barrier, the improvement in the new homes market will become more clearly evident.
May’s high level of residential permits exceeded April by 7.9% and last May by 25.0%.
Permits are a leading indicator for starts, since they consistently precede the digging of foundations by one or two months. Therefore, the prognosis for starts in the summer months of this year has perked up nicely.
Of course, that assumes the deterioration in the external environment — by which I mean the global economy and, more pointedly, Europe’s debt problems — can be brought under control.
The Greek vote on June 17, which endorsed ongoing austerity (i.e., the status quo), at least took the crisis off the boil.
The downward spiral of Spanish banks remains a huge concern. The whole Spanish economy is being dragged into the vortex.
The yield on 10-year Spanish bonds recently rose above 7.00% for the first time since the Euro was introduced in 1999.
Greece, Ireland and Portugal each set a poor precedent. Once their bond yields rose above 7.00%, they quickly needed bailout money. When interest rates rise to the 7.00% threshold, the cost of financing a budgetary shortfall can quickly spin out of control.
The size of the Spanish economy is double that of Greece, Ireland and Portugal added together.
Austerity measures are having a positive effect on government spending as one half of the deficit equation. Where the problem now lies is in terms of revenue.
As long as growth falters — Spain’s GDP will decline again this year and its unemployment rate is over 20% — tax receipts will be inadequate.
Europe’s new stabilization fund will begin operating in early July and member nations are adopting measures to achieve tighter fiscal and monetary union. Some form of revenue sharing, deposit insurance for Euro-zone banks and joint backing for some debt instruments are being considered.
But progress continues to be frustratingly slow and leadership from Germany (the region’s one true economic powerhouse) appears to be clumsy at best. No wonder potential lenders are wary about committing to the region.
For its part, the U.S. Federal Reserve is doing what it can to shield and strengthen the U.S. economy. The federal funds rate will be kept in a range between 0.00% and 0.25% until late-2014.
Also, a QE3 program (printing more money) or an extension of Operation Twist (to dampen long-term interest rates) may be in the offing if world trade or global financial markets face additional adverse effects.
Let’s conclude with some comments on the regional pattern of U.S. home starts.
The South (+28.9%) is leading the way with the largest year-to-date percentage change, although the West is not far behind (+27.9%).
The Midwest (+22.5%) is also performing well and, while the Northeast (+14.2%) trails the other regions, it’s still recording a double-digit percentage increase.
In terms of the month-to-month progression of starts, only the West has been on a marked upward path so far this year. The other regions have exhibited volatility in their starts levels, ahead one month and behind the next.
Finally, year-to-date single-family starts (73% of total starts) in May were +19.3%, a substantial rate of increase.
Nevertheless, single-family starts suffered by comparison with their multi-unit counterparts.
Multi-unit starts (27% of total starts) climbed 44.1% in January to May of this year versus the first five months of last year.