Continuing on the theme of housing data volatility, there was much contradictory information in the latest release from the Census Bureau on residential construction activity.  The headline number for seasonally adjusted annual rate of new permits topped 1 million for the first time since the housing collapse.  That’s an 87% rise from February 2011, only a few years ago.

ABOOK May 2013 Housing Starts Completions Permits

However, on the downside, housing starts dropped 168k to levels we saw in September and October 2012.  And, in a theme we have highlighted before, completions continue to fall behind all of this activity.  The growing divergence between starts and completions cannot simply be a labor shortage since it has dragged on now for more than a year while growing larger.

If there was a labor shortage in residential construction, that would mean a growing upward pressure on construction wages would be in process since builders would be under pressure to finish projects in a reasonably timely fashion.  That would further lead to heightening profit pressures in between the permit process and final construction, perhaps dampening appetite for additional units.

We still need to use caution here, as even the Census Bureau admits each of these data points is extremely noisy – even more now given the dramatic inflection seen since mid-2011 (long before QE 3).

“In interpreting changes in the statistics in this release, note that month-to-month changes in seasonally adjusted statistics often show movements which may be irregular.

It may take 2 months to establish an underlying trend for building permit authorizations, 4 months for total starts, and 6 months for total completions.”

If we incorporate these warnings into the data, the smoothed results are largely the same with one striking exception.

ABOOK May 2013 Housing Starts Completions Permits Averages

Again, the divergence between starts and completions is simply gaping, on average more than 200k units (annual rate).  Either there will have to be some massive increase in hiring or there simply is more to this data than meets the eye.

Along those lines, if we isolate just permits, that striking exception becomes clearer.

ABOOK May 2013 Housing Permits Averages

The pace of new permit activity has obviously changed from its sharp upward trend, coinciding exactly with the announcement and practical settlement of the Federal Reserve’s QE policy of outright purchases of MBS.  I do have some theories about why this may be the case, but have not yet done enough research to confirm or dismiss; for now this will have to remain a conspicuous curiosity.

Of course, one of the driving trends in residential construction is the emphasis on rental properties – multi-family structures.  It was here that the collapse in new starts was most pronounced.

ABOOK May 2013 Housing Multifamily

We also see, despite another spike in permit activity, completions badly lagging.  In fact, completion rates have barely moved since the middle of 2012 in multi-family structures.

There are a couple of explanations for this divergence along the lines of basic economics.  On the one hand there is supply.

ABOOK May 2013 Housing Starts Vacancy Rates

Either the marginal preference for new housing has shifted to owning again (not likely) or the rate of new construction has equalized with household preferences.  The result is a stagnant vacancy rate which means more competition for renters.  That may reduce future demand for new structures.

On the other side, demand, rental rates themselves have not moved much recently.

ABOOK May 2013 Housing Starts Median Rental Price

The plateau in both vacancies and rental prices occurred largely from the middle of 2012.  We can surmise that new construction since 2011 may have satiated whatever new desires there have been for rental units, including any additional household formation.  If that is the case, and again it is hard to tell from this noisy data, there might be at least a pause in new construction activity moving forward.

As I noted before, household income is also a major factor in all of this, so we cannot discount macro parameters either.

 

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