May housing starts jump unexpectedly

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Looks like this "green shoot" may have experienced a growth spurt. U.S. housing starts surged 17.2 percent in May to a seasonally adjusted annual rate of 532,000, the U.S. Commerce Department announced Tuesday, led by a large increase in new construction of multi-family housing.

Economists surveyed by Bloomberg News had expected housing starts to total a 500,000 annualized rate in May. April housing starts were revised to a 12.9 percent decline, or a 454,000 annual rate, from the previously announced 458,000.
In May, starts increased in every region of the U.S.: West, up 28.6 percent; South, 16.8 percent; Midwest, 11.1 percent; and the Northeast, 2 percent.

Multi-family building leads the way

Further, construction of multi-family housing surged 62 percent in May, while starts of single family homes increased 7.5 percent. Still, economists caution against becoming overly bullish based on the recent home start data: investors have to keep in mind that the housing start base is very low, and reflects a sector that has experienced a nearly three-year recession. Hence, higher percentage gains are easier to achieve, at least initially in the sector's rebound.

What's more, housing starts are still down 42.5 percent in the past 12 months, and they've also fallen 75 percent from the sector's peak.

Also, economists caution that it will take three to four months for a trend to form, and also note that housing start statistics have a margin of error and are frequently subject to substantial revisions. In addition, some analysts also say the housing sector regionally may incur a corrective period as long as two to three years -- lasting through perhaps mid-2010 -- as markets such as California and Florida continue to absorb speculative overbuilding during the 2003-2007 leveraging boom.

With the above in mind, investors can nevertheless begin to think in terms of "the worst being over" for the housing sector, if not a post-World War II-esque building boom, so says Wachovia Economist Adam York.

"We're nearing a bottom," York told Bloomberg News Tuesday. "Housing starts will slowly pick up by year-end. With the labor market where it is, we're not confident there'll be a big surge in demand for homes."

Also in May, building permits rose 4 percent to a seasonally adjusted annual rate of 518,000, while permits for single family homes increased 7.9 percent to a 408,000 annual rate. Housing completions declined 3.3 percent to a 811,000 annual rate and are down 28.8 percent in the past year.

Housing Analysis: More modest progress in the U.S. housing sector. Inventories remain high, but if the fiscal stimulus can provide a modest tailwind, and if job lay-offs subside (true, those are big 'ifs'), potential homebuyers who have delayed a purchase may start to enter the market. That would provide another boost for the sector, and one that's needed, given the nearly three-year decline in home sales.
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