Ignore the Headlines: Housing Starts Declined In June

I didn’t post on this yesterday, as I assumed that everyone would understand how new building codes in NYC effective July 1 skewed the new Home Starts to the upside in June.

My assumptions were incorrect.

I’ve already read several embarrassing misunderstandings of this aberrational data (we will keep them anonymous to protect the guilty). In a wildly optimistic, misguided attempt to straighten out some folks who should know better, let’s review yesterday’s numbers.

The Census Department releases New Housing Starts and Permits for Construction each month. For June, the numbers were +11.6% and 9.1% respectively.

However . . . In a large box at the bottom of the Census Press Release (you had to be blind to miss it), was the following:

Building permits and housing starts for June showed large increases of 11.6% and 9.1%, respectively.

Northeast multifamily activity showed the largest gains. New York City enacted a new set of construction codes effective for permits authorized as of July 1, 2008. In June, there was a large increase in building permits issued for multifamily residential buildings in New York City

Excluding the Northeast multifamily data, there was a 0.7% increase in permit authorizations and a 4.0% decrease in housing starts in June 2008.  (emphasis added)

So aside from the aberrational rush to beat the new building codes, we saw a 4% decrease. Further, we should expect this rush in NYC to "steal" lots of starts and permits from future months.

Some comments from various analysts via Real Time Economics:

• The key number in the report, as it is every month, is single-family
permits, which fell by 3.5% — the worst month since March — to a new
1-year low. The trend remains firmly downwards, as it should with new
home sales still falling and inventory outrageously high.  –Ian Shepherdson, High Frequency Economics

• Starts of single family homes, which provide a more accurate picture of the national housing market, fell 5.3% to an annual rate of 643,000. Since the trough of the deep 1981-82 recession, only the single-family starts volume of January 1991 was lower than this latest reading.  –David Resler, Nomura Securities

• Single family construction has simply not fallen by an amount
sufficient to drive any meaningful improvement in the inventory
overhang without even taking into account that significant numbers of
foreclosures will only add to that overhang while the demand side of
the market continues to soften.  –Richard F. Moody, Mission Residential

Finally, a few charts, via Northern Trust’s Asha Banglore:
click for larger charts

Housing_starts_june_08

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Look for a weak July due to this "forward borrow:"

Housing_permits_june_08

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Sources:
NEW RESIDENTIAL CONSTRUCTION IN JUNE 2008
Census Bureau, July 17, 2008
http://www.census.gov/const/newresconst.pdf

Download: New Res Const_June 2008.pdf

Stripping Out New York, Housing Is ‘Bleak’   
Phil Izzo
Real Time Economics (WSJ) July 17, 2008, 10:20 am
http://blogs.wsj.com/economics/2008/07/17/economists-react-stripping-out-new-york-housing-is-bleak/

Housing Starts Declined In June, Headline Is Misleading
Asha G. Bangalore
Northern Trust, July 17, 2008
http://tinyurl.com/5ao7zz

NYC Codes Require New Safety Measures for Construction Sites
Occupational Health & Safety Magazine, July 7, 2008   
http://www.ohsonline.com/articles/65116/

New Fire Code Replaces Rules From 1913
More comprehensive and detailed, the new Fire Code places greater emphasis on enhanced safety for the general public and firefighter/emergency responder safety.
RICHARD GENTILVISO    
Queens Gazette, July 16, 2008   
http://www.qgazette.com/news/2008/0716/features/008.html

House Hearing: Does OSHA Adequately Enforce Construction Safety Rules?
Laura Walter 
Occupational Hazards, June 24, 2008
http://www.occupationalhazards.com/News/Article/81045/House_Hearing_Does_OSHA_Adequately_Enforce_Construction_Safety_Rules.aspx

Homes Data Gets a Lift, by a Fluke
MICHAEL M. GRYNBAUM
NYT, July 18, 2008 
http://www.nytimes.com/2008/07/18/business/18econ.html

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What's been said:

Discussions found on the web:
  1. Timothy Sykes commented on Jul 18

    Good post, b ut I think you gotta stop being so polite and name those who are guilty…squash them like the bugs that they are…this is not gossip blogging, cutting through the muck in this industry, and there is a lot, saves readers $

  2. CNBC Sucks commented on Jul 18

    Nice digging under the real story on housing. So let me understand the recent rally: it was driven by oil (or was oil driven by the stock market?), Wells Fargo, and the seemingly good housing news. The housing news as it turns out was not that good, Wells Fargo has $2.1 billion in an unrealized loss (http://seekingalpha.com/article/85663-wells-fargo-leaves-much-uncertainty-in-wake-of-latest-earnings), and we only know US demand for gasoline is going down but we don’t know yet what will happen to global demand.

  3. Steve Barry commented on Jul 18

    I read that housing is down nationally 18% from its peak. Referring back to this Shiller Chart, so the index is probably around 170 now. I think it has to go to 110 or lower to get any stabilization. That means another 35% drop, which will put many homeowners upside down and ready to walk. I wish we had an updated chart…HINT BARRY!!!!!!! You probably have enough pull to get one from Shiller.

    ~~~
    BR: I publish that every month . . .

    Here is last month
    http://bigpicture.typepad.com/comments/2008/06/case-shiller-in.html

  4. Steve Barry commented on Jul 18

    OT: For those interested in stock charting…take a 5 year chart of MSFT…draw a line at 26.70. You’ll see that line has been critical support and resistance many times throughout the years. Only the last 2 day it was above that line…but remember my 2 day rule…any 2 days of trading can be discounted until confirmed. Sure enough, on today the third day, massive gapdown below 26.70. The stock is going sub-20. GOOG is looking equally as poor, massive island reversal. There are no shorts to cover in either of these names either.

    Disclosure: Long QID

  5. 12th Percentile commented on Jul 18

    Anyone else see a NYC crash in multifamily in the works?

  6. Michael Donnelly commented on Jul 18

    I’m one of the sorta guilty. For 30 minutes (11:30 to noon) I had a post up where I was ranting and raving about how looney the Census data was. Then I reposted at noon after I called Census with all my questions and they read the box to me….

    Because in 2007 Northeast single family starts were 65% of all starts, (that ratio generally holds everywhere), but in June, single family starts were 25% of the market. So I knew something was up.

    WSJ got it right, but I did list the ones that I saw that were wrong. (USA Today and NY Times)

  7. Steve Barry commented on Jul 18

    Citi says they had a great June in trading…maybe they shorted themselves.

  8. Steve Barry commented on Jul 18

    BARRY:

    The chart I would like is a little different…yours shows y/y change…I want the index value, inflation adjusted as in the link I gave. I think I found the index values in tabular form on The S&P website, but it is not inflation adjusted.

  9. michael schumacher commented on Jul 18

    “timmmay”-

    Got to agree……BR hasn’t even dealt with the farce of the short seller “limits” from Tuesday. You’d think that would be a great rant since the SEC won’t enforce the original rule for all stocks let alone for the “precious” 19.

    Ciao
    MS

  10. Bob A commented on Jul 18

    A buddy works a major national broker specializing in apartments buildings. Number of transactions this year off 40%.

  11. Steve Barry commented on Jul 18

    OK…I think Shiller uses the 20 city composite, inflation adjusted in the famous chart from the Times. If that is true, the home index peaked at about 215 in 2006 and is now at 175 or so as of April. My earlier target of another 35% drop seems valid and conservative. It could easily overshoot to down 50%.

  12. Francois commented on Jul 18

    “we will keep them anonymous to protect the guilty”

    Silly me, who thought that it is the innocent that ought to be protected.

    Oh well! Call me old fashion. :-D

  13. Jeff commented on Jul 18

    Financials somehow up again today so far. Anyone else believe this is at least partly due to the implication that the Feds will simply just bail out any of the big players on Wall Street if/when the excrement hits the fan? Shorting these companies is a perilous game right now, even if the shorts are “right”. I guess this is what the Bush crowd means by “free markets” – free for them to make money and free for me to lose it.

  14. Jim Haygood commented on Jul 18

    So-o-o-o … what actually changed in the NYC building code?

    Did they decide to allow modern metal water tanks, instead of the silly wooden water barrels that sit on top of every building (one of the longest-running scams in history for the ‘approved supplier’)?

    Did they finally decide to allow garbage disposals in residential sinks?

    NYC is like, so 19th century.

    ~~~

    BR: The changes require additional on-site water supply, fire alarm voice systems, wider stairwells, and emergency generator power for all new high-rise buildings.

  15. fatbear commented on Jul 18

    Barry – the same thing happened in 1963-65 – city changed zoning law, lowering density in multi-family (actually changed FAR for residential) – this brought about an anticipatory major boom in white brick buildings, all rental in those days – so much boom that market rate rent rise stalled, and in ’64/’65 one could get a very nice apt in a new building with up to 6 months free rent on a 2 year lease (e.g., 155 West 68th, where I did) – ah, the good old days

  16. leftback commented on Jul 18

    No more million $ studios !!!

    NYC is massively overbuilt – both residential and commercial. The housing tsunami is about to hit Manhattan – less bankers and smaller bonuses. Shorting opportunities in companies with big NYC CRE activity? I am getting long SRS when this rally peters out.

  17. Abner commented on Jul 18

    Too funny. I saw some (incorrect) blathering about this on either Fox or CNN as I was buying my lunch and just thought – wow multi-family way up? That’s odd? Hmmm tuna fish…

    Thanks for clearing that up.

  18. silver commented on Jul 18

    Why are you so worried by this aberration, the Meeeedia will be all over it like a rash NEXT month …….. ha ha

  19. The Wise Fool commented on Jul 19

    The housing boom was fueled by historically low rates and the easing of credit to n on-qualified buyers. The administration attempted to shift the renter/owner ratio in favor of higher homeownership as a means to build wealth and retirement funds for those of lesser means. The result was a surge in demand at the lower end of price spectrum which pushed demand in each price tier. This also sucked traditional renters out of the rental market and suppressed rents since 2000. Thus the chart above was affected on both ends by the increasing prices and flat to decreasing rents. It will take time to absorb the increased stock as the low end buyers, who entered the market from 2000 to 2006 will likely never return to the market. However, the sell off of foreclosure by he bond trustees for mortgage backed assets is being done with no ramifications for loss. Properties are trading at the low end of the spectrum for as little as 30% to 40% of prior values. This is bringing wise investors back into the market and clearing the oversupply. There is still a market hangover that will likely last for the next 6 to 9 months, excluding the most frothy markets, but once the excessive foreclosures are gone, the next tier of sellers will be significantly more price sensitive and prices will stabilize. Price stability and general inflation will cause a rebound in the market.

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