Joel L. Naroff
President and Chief Economist

INDICATOR: June Housing Starts and Permits

KEY DATA: Starts: Up 6.9%; 1-Family: Up 4.7%; Permits: Down 3.7%; 1-Family: Up 0.6%

IN A NUTSHELL: “The missing link, the housing market, is slowly coming back and that is one reason we can hope that growth is not a weak as believed.”

WHAT IT MEANS: Housing was usually stage one of past economic recovery rockets and this time around the bursting housing bubble was a chief reason this upturn is a bottle rocket not a Saturn VB moon rocket. Slowly but steadily that is changing.

Housing starts jumped in June to the highest level since the financial crisis exploded in October 2008. Both single-family construction and multi-family activity rose solidly. Gains were generally across the nation but the West and the Northeast were the leading lights.

Starts surged by nearly 37% in the West and by more than 25% in the Northeast. Large cut backs in apartment construction held back building activity in the South and Midwest.

Looking forward, permit requests did ease but they had been running well above starts previously and now they are more in balance. Indeed, last month I had forecast a pop in June starts because of the large gap between starts and permits.

Consequently, we have to expect that starts will be stable in July since permits are now slightly below starts. There are a lot of permits that have yet to be used so construction should remain firm.

MARKETS AND FED POLICY IMPLICATIONS: Home construction rose robustly in the spring as the housing market continues to make progress in its recovery. Even with that improvement, first-half 2012 starts are maybe one-half where they should be in a normal market and that leaves a lot of room for further gains.

The extraordinarily low mortgage rates, which are still dropping, should help though not as much as we would like. People still need down payments and with equity down and prices only beginning to rise, it will be quite a while before a strong market becomes a reality.

The rise in the housing market should add to the debate about how fast the economy grew in the spring. Estimates of second quarter growth have been marked down dramatically since the weak June retail sales numbers were released.

Yes, consumption was not a major driver of growth but to some extent that may be offset by the continued strength in housing. And unless peace has broken out across the world and I managed to miss that email, the sharp declines in defense spending that have restrained growth in the last two quarters could easily turn around.

Thus, I believe that second quarter growth, which will be released on Friday, July 27th could come in north of 2%. Strangely, a number just above 2%, which is not very good, would be a major positive surprise and investors are looking for anything to boost confidence.

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