Construction began on the fewest number of new homes in nine months as a record drop in the South overtook activity in the rest of that United States.
Housing starts unexpectedly fell 9.3 percent in June to an annualized rate of 893,000 from 985,000 in May and 1.063 million in April, according to the Commerce Department in Washington D.C. today. They have now fallen 16 percent in three months. Economists in the Bloomberg survey had predicted 1.02 million starts.
Except for the weather related 19 percent collapse in starts from last November to January, this is the steepest drop in new construction since the housing bubble began to deflate in the first quarter of 2006.
Building permits, a leading indicator for the housing sector, fell 4.2 percent in June from the upwardly revised 1.005 million in May and are down 9 percent in three months.
The weakness in hosing starts was specific to the South where construction slumped 29.6 percent to a 375,000 pace, the slowest in almost two years.
The size of the Southern construction market, more than 40 percent larger than the second most active area, the Midwest with 219,000 units in June, a 28.1 percent increase, let its fall subsume expansion in the other three areas of the country. Housing starts rose 14.1 percent in the Northeast to a 105,000 annual rate and 2.6 percent to 194,000 in the West.
The most likely explanation for the collapse in the construction in the South has been its relative boom. For more than a year housing starts in the South have routinely doubled and tripled the activity in the Midwest, Northeast and West. Over the last year starts have averaged 469,999 annualized per month in the South. In the Midwest the average is 161,000, in the West it is 218,000 and in the Northeast just 105,000. As the overall housing sector has cooled the precipitious fall in the South was just reversal of its rapid ascent.
The housing industry and construction starts have been on a steady if uneven recovery since bottoming in February 2011 at 517,000. It took two years for the number of new projects to reach 994,000 in March 2013 from where they skidded 16 percent in three months to 831,000 that June. Yet from June to November last year starts soared 33 percent in five months to the post-recession high of 1.105 million this past November.
In the housing market volatility of the past year, several facts stand out.
Housing starts are a leading indicator for the construction industry's input to economic activity and GDP. Their most recent six month average, 952,000 is just 2/3 of the 1.431 million average for the 13 year period from 1990 to 2002. This timeframe was chosen to avoid the excesses of the housing bubble which began to accelerate in 2003 and reached its peak in January 2006 when work started on 2.273 million new homes.
Over that 13 year period the U.S. population averaged 269 million. It is now 317 million, an 18 percent increase. An equivalent increase on the number of housing starts would bring the annualized rate to 1.69 million. The six month average of 952,000 is just 56 percent of the population corrected projection for a historically normal housing sector.
Despite five years of historically low mortgage rates and the Federal Reserve’s zero rate policy, the housing market has not recovered to anything like its pre-bubble health. The current demand for new homes is just a bit more than half what the population warrants if other economic facts were equal.
One of the strongest and most consistent aspects of economic life in the United States has been the drive to home ownership. It has been a crucial factor in the GDP record of the past 50 years. If the interest in home ownership has diminished then the prospects for a return to pre-financial crash growth rates have likely diminished along with it.
Chief Market Strategist
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