NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
INDICATOR: February Housing Starts and Permits
KEY DATA: Starts: +0.8%; 1-Family: +0.5%; Permits: +4.6%; 1-Family: +2.7%
IN A NUTSHELL: “As goes the housing market, so goes the economy and the signs are looking good for both.”
WHAT IT MEANS: The housing market took away and now seems to be giving back as the recovery in this sector continues. Construction of new homes picked up in February, hitting the second highest since July 2008. Only the December 2012 pace exceeded the February starts rate and that may have been hyped by warmer than normal weather. Both single-family and multi-family construction rose with the single-family component replacing the December rate as the highest number since July 2008. Regionally, the gains were not evenly spread. Starts soared in the Midwest by nearly 40% and by almost 20% in the Northeast where Sandy reconstruction is starting to pick up. But there were moderate declines in the South and West. Still, these data do bounce around and the trend across the nation is up. Looking forward, a spike in housing permits points to greater construction activity in the months to come. Interestingly, the biggest gains in permit requests were in the West and South, implying that the February drop was only a temporary slowdown.
MARKETS AND FED POLICY IMPLICATIONS: Housing crashed the economy and is now leading it forward. The rise in housing starts comes even as the National Association of Home Builders/Wells Fargo index of builder confidence has been moderating lately. Interesting, the falling confidence is not coming from a decline in demand. The opposite is occurring. It is due to the roadblocks to selling new homes, including low appraisals and continued strict credit requirements. There are also complaints about rising material and labor costs as well as supply chain bottlenecks. Those cost issues may be troubling to builders but to me they are sings of a growing sector. Importantly, confidence and construction are not going in the same direction. Not only are starts rising but the number of home permitted but not started is increasing as well. Since developers are not spending money on permits unless they are pretty certain they will be using them soon, the increasing inventory of permits says to me that builders expect activity to accelerate. That bodes well for an economy that will be facing the headwind of sequestration. If it is allowed to continue, and it looks like it will, the impacts will start building as we go through the spring. The softening in activity created by the spending reductions will not be enough to kill the recovery, but it will slow it down. Of course, there will be those who say that since the economy continued to grow, all those arguments about spending cuts hurting growth are false. That will be just as silly as arguing that since the economy continued to grow even after the tax increases were implemented, raising taxes doesn’t hurt the economy. Imagine where we would be if neither took place. Regardless, investors who are concerned about the economy should be buoyed by this report though the crazy decision to tax deposits in Cypress will hang over the markets until it is clear what the impact will be on depositors’ confidence in other weak bank nations.
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