Today, the Commerce Department released data showing housing starts to have hit a six-month high, at an annualized rate of 629,000, representing a 14.6 percent increase over May's figure. At first glance, the latest jump seems a reason to cheer. Housing, once a major engine of U.S. economic growth, is now perhaps the greatest weight holding the country back from recovery. The collapse of housing savaged the savings of millions of American homeowners, and continues to make for a dearth of construction jobs, with 2.2 million fewer jobs now in that sector than before the recession. Yet while the newest data may portend a healthier housing sector, it's not time to break out the champagne just yet.
Housing Still Far From Healthy
"Even if you look at levels before housing entered into bubble territory, we were still seeing housing starts more than double the level that they're at now," says Conrad DeQuadros, economist at economic consulting firm RDQ Economics. Broadly speaking, annual housing start rates in the late 1990s, before the bubble, hovered between 1.4 million and 1.7 million. Some economists say that reaching that rate again could take three to four years.
Volatile Market, Noisy Data
Overly optimistic predictions of a housing recovery should perhaps be taken with a grain of arithmetical salt. According to Adolfo Laurenti, deputy chief economist at Chicago-based financial services firm Mesirow Financial, "[June's housing starts figure] is a large jump from the last month, but for the last couple of months, we had had abysmally low numbers. So even if we had an increase by 15 percent over last month, the volume [of housing starts] is still very, very low." Indeed, taken alongside the last two years of numbers, the June bump looks like little more than noise. After plummeting to a low of 478,000 in April 2009, housing starts stabilized modestly, and have mostly remained around or just below 600,000 for the last two years. So while June's sudden month-to-month growth is encouraging, a figure of 629,000 does not appear far out of the ordinary in the broader context of the data.
In addition, the Commerce Department's estimates come with large margins of error. For example, June housing starts may have been up 14.6 percent over May's figure, but also with a 10.9 percent margin of error. For housing with five units or more, like apartment and condominium complexes, the growth is even sharper. The 31.8 percent increase in this area is encouraging, but the margin of error surrounding that figure is 33.2 percent, meaning that this increase is not statistically significant—that is, it could potentially be chalked up to chance.
Do We Even Want Many Housing Starts?
"The biggest headwind for the housing sector is the excess supply of housing," says DeQuadros. And when a market is flooded with inventory, adding inventory can be detrimental, he says. "I think if there was a big pickup in housing construction, a lot of that would just go into higher levels of new home supply. That market is competing with the existing-home market." Laurenti agrees. "There is a huge inventory for home sales, in part by current owners," he says. "We have seen very little starts, but we have also seen very little sales. So there are a lot of people on the market who want to sell and cannot." And aside from homes that have for-sale signs on their lawns, Laurenti says there is also the "shadow inventory," made up of people who would like to sell but have given up trying in the current tough market.
Foreclosure Still a Lengthy Process
One factor holding the housing market back from recovery is the slow pace of foreclosures, which means that a backlog of properties is still waiting to move through the market. According to Laurenti, there are two chief reasons for this. One is that banks do not have the capacity to deal with such a large volume of foreclosures: "I think [banks] were not prepared, and they lack the skills and the people to manage the volumes that they have to deal [with]," says Laurenti. "If you look historically, banks are not property management companies and they are not real estate companies. They had very few people who were working in this line of duty, and all of a sudden it's becoming one of the major things they do."
But he adds that there is also potential gain for banks in hanging on to foreclosed homes a bit longer: "The longer they hang on to properties, the higher the hope that sooner or later prices may stabilize and even increase a little bit, and that will give them the opportunity not to lose as much money as they could do if they would move swiftly right now."