June 17, 2009 (Housing Market Monitor)
Mixed Signals on Housing Market
By Dean Baker
June 17, 2009
The end of the homebuyer’s tax credit spurred housing starts.
The Census Bureau reported an unexpected jump in housing starts and permits in May. Nationwide, starts were up 17.2 percent in May from their April level. Permits increased by 4.0 percent. The West saw the sharpest increase with a jump in starts of 28.6 percent, followed by the South with an increase of 16.8 percent. By contrast, starts in the Northeast increased by just 2.0 percent.
The rise in starts was strongest in multi-family units, which increased 77.1 percent from their April level. Starts of single-family homes improved by a far more modest 7.5 percent. Starts of single-family homes in the Northeast actually fell by 12.5 percent in May.
Interestingly, non-residential construction has also been surprisingly strong in recent months, with the April data showing a 1.8 percent increase. Non-residential construction for the month was actually 2.0 percent above its year ago level. This has been attributable to sharp increases in construction in the power generation and manufacturing sectors, 30.0 percent and 71.2 percent, respectively. The latter increase is primarily attributable to bio-fuel processing facilities.
The positive news on starts contrasts with other news suggesting little evidence of a pickup in the housing market. Most importantly, the Mortgage Bankers Association Mortgage Applications Index showed applications for purchase mortgages remaining at very low levels, while applications for refinancing have plunged since peak levels in April.
The reason for the plunge in refinancing over the last two months is the sharp rise in mortgage interest rates. With interest rates close to a full percentage point higher than their April low, there are far fewer homeowners who stand to save money through refinancing. Unless the Fed makes a determined effort to push down mortgage interest rates in the months ahead, refinancing is likely to remain at very low levels.
The end of the refinancing wave will also be another source of downward pressure on the economy. If 15 percent of outstanding mortgages were refinanced over the months from February to April, this would have generated more than $15 billion in fees over this three-month period. On an annual basis, this is equal to $60 billion or 0.4 percent of GDP. As refinancing becomes a rarity, the demand for workers in this sector will plummet, leading to another round of layoffs in banking.
The other piece of notable negative news in the housing sector was the fall in the National Association of Builders’ Confidence Index. This showed a fall in May, reversing modest upticks in prior months. Clearly the builders are not confident about the future of the housing market.
There is a simple way to reconcile the rise in permits and starts with other news about the economy in the last month, which has been largely negative. First, the April data was extraordinarily bad, making it easier to have a large jump the following month. The improvement in housing was measured against a very low base. For the country as a whole, starts were down by 45.2 percent compared with May of 2008. In the Northeast, starts were down by an incredible 58.5 percent from their year ago level.
The most likely explanation for the uptick in starts is the expiration of the first time homebuyer tax credit in November. If builders had already purchased land and made plans for building units, it would be very helpful to have the homes completed, or nearly so, before the expiration date on the tax credit. For this reason, it is likely that many builders moved their plans forward. If this view is accurate, then starts and permits should begin to decline further by the end of the summer.
Overall, there is little evidence to suggest that the housing market is nearing any sort of turnaround. As noted before, a turnaround will show up first in an increase in sales, which will gradually whittle down the huge excess inventory of unsold homes. It is implausible that the construction sector will rebound in any significant way as long as there is a huge glut of homes already on the market.
Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.