NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

INDICATOR: June Housing Starts and Permits

KEY DATA: Starts: -5.0%; 1-Family: -0.7%; Permits: +2.1%; 1-Family: -3.4%

IN A NUTSHELL:   “The housing market continues to wander aimlessly.”

WHAT IT MEANS:   If you build it who knows if they will come?  That seems to be the concern facing builders across the country.  Housing starts fell in June but that was not really a major surprise.  Yes, the drop was more than expected, but given the loss of government incentives, a pullback was nothing that couldn’t be readily forecasted.   The fall off in construction was also spread fairly evenly across the country.  There was a somewhat larger decline in the Northeast but less so in the South.  While multifamily activity fell the most, single-family starts hit its lowest point in over a year.  That is not positive news.  The real question concerns the direction of the sector.  Permits were up sharply for condos and coops and that is likely to be the key part of the housing market for a long time to come.  Between aging baby boomers and a younger generation looking for ownership without major costs, this could be the place to be over time.  Of course, there are still places in this country where the overhang of largely empty condos/soon-to-be-rental buildings will limit construction.

MARKETS AND FED POLICY IMPLICATIONS: Despite a spike in construction in May as the incentives ended, housing starts were down in the second quarter compared to first quarter levels.  That does not bode well for second quarter GDP growth.  Given the downward spiral, it is likely that housing will detract from growth in the third quarter.  This is not a sector that is doing well despite historically low level of interest rates.  With credit standards back to where they were before lenders thought anyone who wanted a home should get money to buy one, and with housing equity for many people limited, it is a lot harder to qualify for a mortgage or come up with a down payment.  That is not likely to change for a while.  Thus, this is another indication that the recovery is likely to be sluggish during the second half of the year.  Investors finally seem to understand this, which explains a lot of the noise but little movement over the past two months.  There had been some irrational exuberance over the potential for a “V”-shaped recovery and now that reality has set in, the outlook for earnings is much less clear.  Meanwhile at the Fed, the members are trying to figure out what to do if the economy remains soft.  Unfortunately, I don’t think they have many more bullets left.  Can you say “liquidity trap”?  That is, it is not rates but willingness and ability to borrow and lend that is restraining growth.