Housing Starts Growth Beats Expectations in November

In the beleaguered U.S. housing sector, even modest good news -- such as November's unexpected 3.9% rise in housing starts to a 555,000 seasonally adjusted annual rate -- represents a victory. Adding a bit to that small win, October's total also was revised modestly higher to 534,000 from the initially estimated 519,000 tally. In November, starts of single-family homes totaled a 465,000 rate, up 6.9% from October's revised 435,000 rate.

Economists survey by Bloomberg had expected November housing starts to register a 550,000-unit annual rate, after running at a 601,000-unit rate in September and 589,000 in November 2009. They hit a cyclical low of a 477,000 in April 2009.

U.S. government housing officials caution that initial housing starts data contain a large margin of error, and revisions can likewise be large. Housing market analysts also emphasize that it can take three to five months for trends in the sector to form, and retrenchments are possible.

One negative note in the November report comes from building permits -- considered a leading indicator of housing construction: They fell 4% to 530,000 and are now 14.7% below the 621,000 rate registered a year ago. However, permits for single-family homes rose 3% to a 416,000 annual rate.

In November, housing starts rose in three of the four U.S. regions, surging 15.8% in the Midwest, and rising a modest 2.3% in the South and 2.1% in the West. In the Northeast, they fell 2.5%.

The Long Journey to Normal Activity

After the housing sector's large contraction during the 2007-2009 recession, building activity in the U.S. is at such low levels that even a decent report is worth cheering.

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That said, economists caution against investor giddiness regarding the sector based on recent data. Even excluding the numbers from the 2004-2006 period of homebuilding mania (when starts exceeded a 2 million-unit annualized rate), current starts are still far below the 1.3 million-unit to 1.7 million-unit range that prevailed during the 1990s Clinton-era economic expansion and the 1983-1988 Reagan-era expansion. Given the recovery's current trajectory, it will take another 18 months to two years for housing starts to approach those normal levels.

Of course, the major unknown is whether the years ahead will approximate historical norms. The nation's economy is undergoing structural changes -- one factor behind the continuing high unemployment rate. And historically, job creation -- a key to household formation -- has been a major factor promoting rising home sales.

The U.S. will have to start adding about 150,000 to 200,000 jobs per month consistently, and have a substantially lower unemployment rate, to keep home starts and sales trending higher. But given the changes occurring in the economy and workforce, the creation of those jobs is hardly assured. That's why it's premature to declare an end to the housing sector's slump.