U.S. Housing Starts Rose for Third Straight Month in September

U.S. housing starts registered their third straight monthly gain in September, unexpectedly rising 0.3% to a 610,000 annual rate -- providing additional evidence that homebuilding in the beleaguered U.S. housing sector may be bottoming. However, economists caution that monthly housing starts data contain a margin of error, and revisions can be large. In addition, they underscore that it can take three to five months for a trend to form, and retrenchments are possible.

A Bloomberg survey had expected September starts to dip to a 580,000 annual rate, from August's revised 608,000 rate, an improvement from the initially released 598,000. Housing starts totaled a 550,000 annual rate in July and hit a cyclical low of 477,000 in April 2009.

Single-Family Homes Up, Multifamily Down

A year ago, starts totaled a 586,000 annual rate, which means they're up 4.1% in the past year -- a slight improvement from August's 4% year-over-year rise. September housing starts increased in two regions, the Northeast (up 2.9%) and the South (up 4%), and dropped in two, the Midwest (down 8.2%) and the West (down 3.6%).

Also in September, starts of single-family homes increased 4.4% to a 452,000 annual rate, while apartment/multifamily starts plunged 9.7% to a 158,000 annual rate.

One negative in the September starts report concerned building permits -- considered a leading indicator of housing construction. They fell 5.6% to a 539,000 annual rate, the lowest level since April 2009.

A Large Hole to Fill

Despite the modest progress evident in September's housing starts data, investors need to keep in mind how far building activity fell during the 2007-2009 recession. Even excluding the home building mania of 2004-2006, when starts exceeded a 2 million-unit annual rate, starts are still below the 1.3 million-unit to 1.7 million-unit pace of the 1990s economic expansion and the 1983-1988 expansion.

So, even though housing starts have risen in the past year, they're still less than half what they need to be.

Of course, the major unknown concerns whether U.S. housing starts in the years ahead will approximate historical norms. The U.S. economy is undergoing structural change -- which is contributing to the nation's high unemployment rate. Historically, job creation -- a key to household formation -- has been a major factor in rising home sales. The U.S. economy will have to demonstrate that it can add about 150,000 to 200,000 jobs per month to both maintain the economic expansion, substantially lower the unemployment rate and keep housing starts and sales trending higher.

Clearly, that won't be easy, which is why it would be premature to declare an end to the U.S. housing sector's slump.