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NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
INDICATOR: April Housing Starts and Permits
KEY DATA: Starts: +5.8%; 1-Family: +10.2%; Permits: -11.5%; 1-Family: -10.7%
IN A NUTSHELL: “Builders enjoyed better weather and expiring home buying incentives in April but declining permit requests raises questions whether construction will continue to improve going forward.”
WHAT IT MEANS: Housing starts soared in April and normally that would be considered great news. And indeed it is. Construction of single-family homes jumped sharply and with builders on starting units if sales are certain, that indicates demand is picking up. Multi-family construction fell, but this is a volatile component. New activity was strong everywhere except in the foreclosure-challenged West. Meanwhile, housing permit requests cratered. That seems to point to a pull back in activity going forward. I am not so sure about that. The number of houses that had been permitted but not started rose sharply in March and while it fell in April, there are still a fair amount of units that could be quickly built. That seems to point to developers simply being quite cautious.
MARKETS AND FED POLICY IMPLICATIONS: This is a two-armed report: Strong construction but weak permit requests. So what should we make of these numbers? Undoubtedly, the ending of the home-buyers’ incentive created some of the extra activity we saw in both March and April and there is likely to be a reduction in construction in the next few months. There is also the problem of “challenged” existing homes being sold at fire sale prices which makes it tough for builders to compete. Thus, we shouldn’t expect housing to be a major driver of the economy for the rest of the year. But conditions are improving. Prices are stabilizing if not rising slowly in some areas. Mortgage rates are low and that seems to be driving some of the activity. Indeed, the National Association of Home Builders/Wells Fargo builders’ confidence index rose to its highest level in over two and a half years in May. Of course the level is not great, but it is moving up and given it continued to rise even as the incentives have disappeared is positive news. So my take is that we should expect near-term volatility in the numbers but when we look back at things in the fall, we will see a slow but steady improvement in home construction. That should be good news for the markets, though how much fundamental economic numbers matter given the situation in Europe is not clear. As for the Fed, this is another indication that the expansion is moving forward and is starting to lift some of the weaker sectors. That could provide ammunition for those who want to end the low rate policy sooner rather than later.
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