September 21, 2010

Housing Starts Rose a Surprisingly High 10.5% in August

'Although the headline looks good, the details of the report paint a more downbeat picture'

The U.S. housing market got a much-needed boost on Tuesday as the government's report on August housing starts rose at the unexpectedly strong rate of 10.5%, its highest level in four months.

Specifically, building starts for privately owned homes last month rose a seasonally adjusted 10.5% above the revised July estimate of 2.2%, the U.S. Commerce Department reported. Housing starts, which totaled 598,000 nationwide in August, were 2.2% above the August 2009 rate of 585,000.

Economists' consensus was for 550,000 more units this August, according to a Thomson-Reuters poll.

"Housing starts showed unexpected strength in August with even the single-family component increasing," according to a Nasdaq news report. "The August annualized pace of 598,000 units clearly topped analysts' expectations for 550 million units and is actually up 2.2% on a year-ago basis."

Despite the strong data, the housing market must be viewed with caution, said the North American economics group at Bank of America Merrill Lynch Global Research in an analyst note.

"Although the headline looks good, the details of the report paint a more downbeat picture. The gain in starts was largely due to a 32% pop in multi-family starts, which tend to be incredibly choppy on a monthly basis," the group wrote. "Typically, such big swings in one direction will be quickly reversed, suggesting we should expect a sharp drop in multi-family starts over the next few months."

The less volatile single-family homes data showed starts in August were up at a modest rate of 438,000, 4.3% above the revised July figure of 420,000, after collapsing 25% over the prior three months.

"This shows a weak trajectory in single-family starts, consistent with the deterioration in the National Association of Home Builders (NAHB) housing index and drop in new home sales," the BofA Merrill Lynch economists said.

As for the building permits data that the Commerce Department releases in tandem with the housing starts numbers, privately owned housing units authorized by permits in August came in at an overall adjusted rate of 569,000. This was 1.8% above July, but 6.7% below August 2009. Single-family permits were 1.2% lower than July's revised figure, and multi-family permits were 9.8% higher.

That spells weakness ahead, according to the BofA Merrill Lynch economists, who expect residential investment to be a big drag on third-quarter gross domestic product.

"We expect to see multi-family starts decline over the next few months to reverse this surprising pop. We believe this will occur despite the 9.8% increase in building permits for multi-family homes," they wrote. "Construction spending tends to lag housing starts by a few months, therefore capturing the collapse in starts during the late-spring/early summer. We are currently tracking a 25% drop in residential investment."

Read about the NAHB's September housing index on AdvisorOne.com.

Reprints Discuss this story
This is where the comments go.