Single family starts and permits up in July

Production and permitting of new single-family homes continued on an upward trajectory in July, according to newly reported numbers from the U.S. Commerce Department today. Meanwhile, substantial declines on the multifamily side dragged down the overall numbers, with combined single- and multifamily starts down 1 percent to a seasonally adjusted annual rate of 581,000 units and combined single- and multifamily permits down 1.8 percent to a 560,000-unit rate.

“The latest report marks a fifth consecutive month of improvement in single-family housing starts and a fourth consecutive month of improvement in single-family permits,” noted NAHB Chief Economist David Crowe. “This is exactly in keeping with our latest member surveys, which indicate that builders are cautiously optimistic about single-family sales conditions over the next several months. That said, the significant drop-off in multifamily construction and permitting shown in recent months’ reports may be a harbinger of the financing challenges facing all home builders going forward. A severe lack of credit for acquisition, development and construction financing, along with other issues tied to low appraisals and the upcoming expiration of the first-time buyer tax credit, could derail the progress made so far. Government action is required to ensure that housing can help generate jobs and economic growth in the days ahead.”

The good news is tempered by the potential expiration of the first-time buyer credit, due to expire in November:

“With the impending expiration of the first-time home buyer tax credit at the end of November, July was probably the last month in which to get homes permitted and started in time for customers to take advantage of that valuable incentive,” noted Joe Robson, chairman of the National Association of Home Builders (NAHB) and a home builder from Tulsa, Okla. “Builders were responding to improved demand related to that upcoming deadline and also to the first signs of an economic recovery.

However, it remains to be seen what happens after the tax credit expires, and the severe credit crunch that has curtailed many multifamily projects is looming over single-family builders as well. Congress and the Administration need to take action now in order to maintain the momentum toward a housing and economic recovery.”

SOURCE: NAHB

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