Weakness in Housing? Forget It
DECEMBER 20, 2005
NEWS ANALYSIS
By Michael Englund and Rick MacDonald
As if to tweak the noses of housing-sector pessimists, the November U.S. housing starts report released on Dec. 20 revealed another stellar performance: a rebound of 5.3% on the month, to a 2.123 million annual pace, from a revised 2.017 million in October (2.014 million previously). Building permits rose 2.5%, to a solid 2.155 million pace, from a 2.103 million rate in October (revised from 2.071 million).
The report showed broad-based strength that defied another wet month and made clear that residential construction will enter the new year on a solid footing. As we at Action Economics have previously noted, all major seasonal adjusted data from the housing and real estate sectors remain strong through the fourth quarter -- and may actually be gaining steam.
This is true despite a small scattering of negative anecdotal evidence and swings in the some of the weekly data that are notorious for both false signals and seasonal fourth-quarter weakness. These reports are no more pronounced then those seen in most fourth-quarter periods -- when the sector always posts a significant seasonal slowdown (see BW Online, 11/29/05, "A Standard Season for Housing").
POST-KATRINA REBUILDING. The November report pushed the most recent figure above the sideways trend that has kept these numbers in or near the 2 million to 2.1 million rate since the start of 2004, despite ongoing fears in the sector of a "popping bubble" (see BW Online, 11/18/05, "Housing: A Blip, Not a Bubble Pop"). November was a relatively rainy month, especially in the Midwest and Northeast, as was October. But adverse weather had little impact on the robust figures for both starts and permits. Starts bounced higher in all but the already robust South, with particular strength in the West.
As some argued with strength in the October new-home sales report, the initiation of sold but unstarted homes -- which is of growing importance for these monthly measures -- likely contributed to strength in the figure, as did rebuilding efforts in the aftermath of Katrina. The permits figure implies that starts will remain robust as entering the new year, with figures in the 2.05 million to 2.1 million area and chances of a surge above this range in good weather months, following the relatively wet and cold start to winter (see BW's Hot Property blog, "An Overhang of New Houses?").
At Action Economics, we expect a solid 0.7% rise in construction spending in November that will likely be followed by similar strong gains through the remaining winter months, led both by new-home construction and repair work.
NO WAVERING. Residential construction in the quarterly GDP reports grew at a 10% rate through the first half of 2005 and is likely to post the same 10% rate in the third quarter once these figures are revised upward again in the final GDP report for the quarter. As it stands, Action Economics expects 13% real growth in residential construction in the fourth quarter, which would mark an acceleration into yearend. Virtually no evidence points to any wavering in this sector, despite pessimists' efforts to keep finding signs of weakness.
Overall, low interest rates, a solid economy, and good growth in income and profits are continuing to support housing, despite recent jitters by a bubble-wary market. In our view, the sector's peak will likely not be seen until 2006. Housing has powerful momentum, and mortgage rates should remain near historically low levels of 7% or less in 2006. Indeed, these rates may moderate somewhat if the Federal Reserve chooses to pause in its tightening path at some point early in the year, as many expect.
A housing-sector correction will clearly remain a big risk through this business cycle. But no meaningful evidence shows that it will emerge anytime soon.
NEWS ANALYSIS
By Michael Englund and Rick MacDonald
Weakness in Housing? Forget It |
The November numbers put to rest the pessimists' claims that the market is popping or about to. If anything, it's gaining steam |
The report showed broad-based strength that defied another wet month and made clear that residential construction will enter the new year on a solid footing. As we at Action Economics have previously noted, all major seasonal adjusted data from the housing and real estate sectors remain strong through the fourth quarter -- and may actually be gaining steam.
This is true despite a small scattering of negative anecdotal evidence and swings in the some of the weekly data that are notorious for both false signals and seasonal fourth-quarter weakness. These reports are no more pronounced then those seen in most fourth-quarter periods -- when the sector always posts a significant seasonal slowdown (see BW Online, 11/29/05, "A Standard Season for Housing").
POST-KATRINA REBUILDING. The November report pushed the most recent figure above the sideways trend that has kept these numbers in or near the 2 million to 2.1 million rate since the start of 2004, despite ongoing fears in the sector of a "popping bubble" (see BW Online, 11/18/05, "Housing: A Blip, Not a Bubble Pop"). November was a relatively rainy month, especially in the Midwest and Northeast, as was October. But adverse weather had little impact on the robust figures for both starts and permits. Starts bounced higher in all but the already robust South, with particular strength in the West.
As some argued with strength in the October new-home sales report, the initiation of sold but unstarted homes -- which is of growing importance for these monthly measures -- likely contributed to strength in the figure, as did rebuilding efforts in the aftermath of Katrina. The permits figure implies that starts will remain robust as entering the new year, with figures in the 2.05 million to 2.1 million area and chances of a surge above this range in good weather months, following the relatively wet and cold start to winter (see BW's Hot Property blog, "An Overhang of New Houses?").
At Action Economics, we expect a solid 0.7% rise in construction spending in November that will likely be followed by similar strong gains through the remaining winter months, led both by new-home construction and repair work.
NO WAVERING. Residential construction in the quarterly GDP reports grew at a 10% rate through the first half of 2005 and is likely to post the same 10% rate in the third quarter once these figures are revised upward again in the final GDP report for the quarter. As it stands, Action Economics expects 13% real growth in residential construction in the fourth quarter, which would mark an acceleration into yearend. Virtually no evidence points to any wavering in this sector, despite pessimists' efforts to keep finding signs of weakness.
Overall, low interest rates, a solid economy, and good growth in income and profits are continuing to support housing, despite recent jitters by a bubble-wary market. In our view, the sector's peak will likely not be seen until 2006. Housing has powerful momentum, and mortgage rates should remain near historically low levels of 7% or less in 2006. Indeed, these rates may moderate somewhat if the Federal Reserve chooses to pause in its tightening path at some point early in the year, as many expect.
A housing-sector correction will clearly remain a big risk through this business cycle. But no meaningful evidence shows that it will emerge anytime soon.
posted by James Haft at 9:26 AM
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