Housing starts up; not as good as it sounds

Housing starts climbed 17% in May. Great news, but once you look closer, it's not as good as it sounds:

First of all, the biggest part of the gain was in multi-family, up 61.7 percent month to month, but that’s after falling 49 percent in April. Patrick Newport, an economist at HIS Global Insight, says the multi-family market is still in a “deep slump,” despite the monthly jump. “Permits, which better gauge underlying conditions, fell 8.3 percent, the 11th consecutive monthly decline, to a record low of 110,000 unit annual rate,” says Newport. “The recent sharp decline in this market is related to financing. Some builders are overwhelmed with debt. Others cannot find funding to finance projects with positive net present values.”

Looking at San Francisco as an example, if there was activity in multi-family, it would be apartments, not condos. Most developers are opting for rentals (while holding out for the possibility of turning condos down the road).

What about the increase in single family homes?

But analyst Ivy Zelman gave me a huge nugget: 50 percent of sales in May were on spec. She says we’re seeing a lot of spec homes now because, “today’s consumer wants to touch and feel the house.” The positives are that cancellations are down, sales are better and there’s less negative pricing, although discounts are still prevalent.

"Spec" is when a developer builds a home without a buyer (in the past, developers would wait for a buyer to sign a contract before starting construction, or let the house wait for a buyer to select cabinets, carpet, tile, etc.). Since it takes 6-9 months to build a home, they must start building now if they want to close escrows before the tax credit expires in November; also, that coincides with the end of the fiscal year for many builders.

However, the elephant in the room is still interest rates:

The big wrench in that tactic is mortgage rates. Zelman claims, “the market collapsed last week.” Yes, it’s now summer, but she says that in Northern California, Las Vegas, Seattle, Chicago, the numbers went back to fourth quarter lows. The spring offered incredible affordability, but the rise in interest rates and the impending end of the tax credit could choke that off in summer.

The investment markets will look at this as a sign of more good news in real estate, and the economy as a whole, but our "green shoots" are starting to get a little wilted. Is anyone at Treasury watching?

SOURCE: CNBC