Plunge in Multi-Family Starts Conceals Small Gain of Single-Family Units

Housing starts fell 12.8% to an annual rate of 458,000, a new record low (see chart 1). Total housing starts have fallen 80% from the peak in January 2006. In April, multi-family starts plunged 46.1% and single-family starts advanced 2.8%. Single-family starts held steady in February and rose 0.3% in March (see chart 2). Starts of new single-family homes have declined each month during July 2007-January 2009, with the exception of a small increase in May 2008. The recent movements suggest that single-family starts appear to be establishing a bottom.

At the same time, the elevated level of unsold new single-family homes (10.7-month supply in March, down from peak of 12.5-month supply in January) is a drag on new construction. The good news is that inventories of new unsold single-family homes appear to have peaked in January 2009 (see chart 3). The Housing Market Index of the National Association of Home Builders bottomed out in January and has risen in three out of the four months ended May (see chart 4).

On a year-to-year basis, starts of new single-family homes fell 46% in April, which is a deceleration after the 53.2% drop in January (see chart 5).

Pulling together the different pieces of news from the housing market, the housing starts report for April leans on the side of optimism because the pace of decline could have accelerated further. Instead, it appears that there is a moderating trend in place with support from other reports. The key to a complete recovery is, of course, a turnaround in employment conditions. The April employment report also contained various indicators that showed that employment conditions are not deteriorating further. In the first quarter, residential loan delinquency and charge-off rates reached new highs (see chart 6) which is not supportive of cautious optimism about housing market conditions. In sum, recent housing sector reports suggest that there is room for optimism, with the caveat that the evidence needs more confirmation before the coast is clear.

From other details of today's report, housing starts rose 42.5% in the West but dropped in the other three regions of the country. Permit extensions dropped 3.3% in April, reflecting a 19.9% decline in multi-family starts and a 3.6% increase in the number of permits issued for single-family starts.