Good News in Housing Starts, but No Turnaround

Multi-family building has driven most of the gains seen in the construction sector lately.

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Builders broke ground on slightly fewer homes in October, but permits—a leading indicator for future construction—increased almost 11 percent from September to their highest level since March 2010.

Sounds encouraging for the languishing housing market, right? It is to some extent, experts say, but dig a little deeper and a more complex picture emerges.

It's not single-family homes fueling the uptick in construction and permits, it's apartments and other rental properties.

It's been that way through most of the recovery—while single-family home sales and new constructions have sunk to historic lows, permits and starts for apartments have quietly inched up over the past few years as builders respond to the demand for rental properties. The foreclosure epidemic has forced many Americans to rent, and angst about the economy, the jobs outlook, and the housing market have kept another set of potential home buyers on the sidelines and still renting.

While multi-family starts leveled off a bit in October—payback for September's surprisingly high numbers—they are still double what they were one year ago. Looking back to September, starts jumped 15 percent—the best reading in 17 months—with multi-family starts, again, driving those gains, jumping more than 50 percent while single-family homes saw barely a 2 percent increase.

[Are Things Looking Up for the Housing Market?]

Go back even further and a more dramatic picture of America's two housing markets emerges. The chart above tracks housing starts since the U.S. Census Bureau began collecting that information in 1959. Things look relatively normal until the 1990s, when single-family building takes off. Multi-family building activity also ticks up quite a bit in the early 90's but levels off while single-family home starts continue their meteoric path upwards.

That sheer blue line plummeting around 2006? That would be the housing market imploding. While single-family home building took much more of a nosedive than the multi-family sector, neither has recovered to more normal start levels. Experts say a healthy number of single-family home starts is around 1.5 million, while multi-family starts should be around 350,000—neither has reached that range since at least 2008.

Some regions, such as Texas and North Dakota, are seeing increased building activity in spite of the bleak national picture, primarily because their economies are tied to the booming energy and agriculture industries. "If you look closer at the state and metropolitan activity, we're beginning to see some recovery," says David Crowe, chief economist at the National Association of Home Builders.

But improving numbers in housing starts in key markets aren't enough to spark a nationwide recovery. Overall, construction will be relatively flat for the next several years. The diverging trend between single- and multi-unit starts will also likely continue, as rental demand continues to buoy multi-family building activity. "

Still, the housing market is showing some moxie and builders are feeling the glow. Although still at depressed levels, builder sentiment is improving according to a recent NAHB report, which means they're feeling just a little more confident about the demand and outlook for housing.

"The single-family market is finally getting off the mat and the multi-family segment is continuing to make small strides," Patrick Newport, economist at IHS Global Insight, wrote in a report. "We should expect good housing starts numbers the rest of this year."