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Deutsche Bank AG
BNP Paribas SA
Canadian Imperial Bank of Commerce/Canada
So the latest housing number is kind of bad: 654,000 new units were started in March, 5.8 percent below the revised February numbers. Economists surveyed by Bloomberg were expecting something considerably higher. The median estimate of the 82 who ventured a guess was 705,000. Even the lowball forecast, 670,000, was too high. It’s the rare economic survey where the biggest bear isn’t bearish enough. Clearly we’ve been fooled by housing again: Just when it looked like he was getting out of bed, the perpetual sick man of the recovery rolls over with some phlegmy numbers.
But how disappointed should we be? Housing starts last month were still 10 percent higher than a year earlier. And building permits were strong, up 4.5 percent from February and 30 percent higher than they were a year earlier. Permits data tend to be the more dependable number anyway, compared with the choppy starts number that tends to get significantly revised. Of course, it’s a lot easier to file a building permit than to start building the thing.
So much of the recently nice housing data was apparently being goosed by the unseasonably warm temperatures over the last several months—which everyone knew. “I thought the weather would give us a bigger lift,” says Joe Lavorgna, chief U.S. economist at Deutsche Bank (DB), who forecast 725,000 housing starts in March.
Betting on the weather can be tricky, though. The minute you start depending on it, it becomes undependable. “What you thought was a weather effect in the earlier numbers suddenly isn’t there in the March data,” says Lavorgna. Turns out that rather than creating new economic activity, the warm weather was probably just pulling it forward, stealing from the spring and giving to the winter. Which seems to be part of the story behind last month’s low U.S. jobs number.
Julia Coronado, chief economist of North America for BNP Paribas (BNP), figured the housing starts number would go one of two ways: “It was either going to be big on the upside or big on the downside.” Coronado chose the upside, forecasting 720,000 new starts. “It was the warmest March on record. We thought that might mean an early start to activity,” she says. At the same time, after a warm fall and a record warm winter when much of the country never froze, construction activity never got postponed. “So we clearly didn’t see the spring surge in starts we typically see in March.”
Among those colored not surprised is Barry Ritholtz, whose “Debunking the Housing Recovery” series has done just that, fairly thoroughly. Ritholtz’s continued housing bearishness can be summed up thusly: There are still too many unsold homes on the market, they’re still too expensive for first-time buyers, there are still lots more foreclosures coming down the pike, and renting is too good an option for too many people, compared with owning.
Which brings us to the final piece of the puzzle: multi-family housing. A lot of the recent housing build over the last few months has been driven by multi-family units: apartment buildings, condos, duplexes—all of which were underbuilt during the housing boom. Some people believe the U.S. is still not building nearly enough rental units, especially considering the relatively high cost of owning. Which makes one of the more troubling lines of the March starts report even more troubling: Buildings with five units or more fell by 20 percent. Reading too much into that isn’t worth the exercise, especially when the percent change for the whole data set has a margin of error of plus or minus 15.6 percentage points.
Still, not everyone’s reading these numbers as bad.
Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce (CM), says the strong permits data refute the warm weather argument, and that construction will grow through the year. Shenfeld, who forecast 675,000 housing starts, believes housing will actually contribute to GDP this year, and that it might already be doing so, despite consecutive decreases in construction spending since December.
Still, even housing bulls are tepid in their enthusiasm. “This isn’t the big recovery in construction we’re waiting for. It’s merely a crawl off the bottom of low homebuilding levels,” says Shenfeld. “Still, the mini-bounce off the bottom has begun.”