Wednesday, October 20, 2010

The Housing Industry Is Stuck In Neutral

Although housing starts rose slightly in September, new building permits fell to the lowest level since last spring. Although the worst appears to over in housing, James Picerno writes that the housing industry is stuck in neutral with no recovery in sight. See the following article from The Capital Spectator for more on this.

Waiting for the housing recovery is like waiting for paint to dry. It’ll happen, but not any time soon. The best we can say is that the market appears to be stabilizing, although it's a stability at a greatly diminished level from the glory days, a.k.a., the years before 2007.

Today’s update on new housing starts and building permits issued for September doesn’t change anything. The market’s still depressed, but it’s getting easier to argue that the correction phase is over. And with each month of uninspiring data, the closer we come to something worthy of a recovery. When will that happen? First we'll need to see signs of life in the labor market, but that looks far off at the moment too, or so the last employment report suggests.

Patience, the French essayist Vauvenargues counseled, is the art of hoping.

Meantime, that leaves us with the meandering we’re-not-going-anywhere phase in housing. Indeed, the latest numbers are split between a decline in September for the seasonally adjusted annual rate of new housing building permits (-5.6% vs. the August pace) and a slight rise in housing starts last month (+0.3%). Unimpressive, to say the least, but looking at the longer-term trend suggests that these leading measures of the housing industry are still poised for treading water, as the chart below implies.

Yes, housing starts last month rose a bit to an annual rate of 610,000, the highest since April. But new building permits—a measure of future housing construction—inched down to a rate of 539,000, the lowest since the spring of last year.

No matter how you slice it, the housing industry is still reeling from the devastating implosion of recent years. The worst is over, but the recovery is nowhere in sight. That leaves us with an industry stuck in neutral, or so one can assume based on the prevailing definition of optimism for this sector.

“The worst of the housing market downturn may be behind us, but the path to recovery is likely to be long and slow,” Russell Price, a senior economist at Ameriprise Financial Inc., told Bloomberg News before today’s report was released. Price’s view is no less reasonable now that we’ve had the benefit of looking over the actual housing numbers for September.

That’s one reason for keeping our expectations for the broad economy muted. As economist Evelina Tainer notes in her book Using Economic Indicators to Improve Investment Analysis, “[Housing] permits are considered to be a leading indicator of [housing] starts and the economy in general…”

By that standard, permits and starts are reinforcing the view that the economy’s bumping along with a small growth bias that's just enough to sidestep a new recession (probably), but not much more. And even that thin reed of of optimism is subject to revision if we run into unexpected trouble.

But hope springs eternal in some circles, or at least what passes for hope these days when it comes to residential real estate. “I have been puzzling over why this is so bad in that sector; I keep thinking it has got to turn around, and hopefully this is the turnaround,” advises Kurt Karl, chief economist at Swiss Re in New York, via Reuters. “Basically, rates are very low and typically when rates are this low and housing prices aren't collapsing you would have a real surge in housing activity. Some parts of the market are blocked up with foreclosures and a lot of people are underwater. Even so, when you look at the starts and the low level of existing home sales, it is way below what you would expect.”

This post has been republished from James Picerno's blog, The Capital Spectator.

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