Permits and Housing Starts Reflect Builder Optimism

Home builders are growing increasingly more confident about the economy and the real estate market and that was reflected in the most recent report on residential construction in the U.S. for the month of January.

The National Association of Home Builders and Wells Fargo released their Housing Market Index (HMI) last week. This survey reflects the confidence NAHB member builders have in the present and the future of the housing market. The HMI increased from an upwardly revised figure of 33 in December to 35 this month - the highest level the index has achieved in seven months.

The HMI is a composite of three surveys that NAHB has been conducting for 20 years to assess builders' perceptions of current single family sales and their expectation of sales over the next six months on a three point scale of very low to very high, and their current assessment of buyer traffic as good, fair, or poor. Any individual or combined score over 50 indicates that more builders view sales conditions as good than as poor.

Two of the three component indexes also registered improvement in January. Current home sales and buyer traffic each gained three points to 36 and 26 respectively; sales expectations for the next six months were unchanged from December at 49.

NAHB Chief Economist David Seiders said of the index, "The same factors that were evident at the end of 2006 continue to hold true in today's housing market - improving affordability measures, strengthening consumer assessments of home buying conditions, and an upswing in applications for mortgages to buy homes. Builders are starting to see that the worst is behind them and that buying conditions have improved to the point that greater optimism is warranted."

The U.S. Census Bureau and U.S. Department of Housing and Urban Development; released their monthly report on new residential construction in December. The Census Bureau report lags the NHBA survey by a month but still indicates that builders are putting down hard cash to back up their perceptions which were evident even in December that life is getting better.

Housing permits were issued (by areas that require them) at a seasonally adjusted annual rate of 1,596,000, 5.5 percent above the rate reported in November but still a substantial 24.3 percent below the estimated rate of 2,107,000 reported in December 2005. The bulk of this improvement, however, was in multiple family housing. Permits for projects with two to four units were up over 27 percent while large developments - over 5 units - increased 17.3 percent. Single family permits were only up 1.2 percent.

Actual housing starts in December were at an annual rate of 1,642,000, 4.5 percent above revised November figures but still behind the December 2005 pace by 18 percent. No figures were available for two to four unit starts (for some reason they never are) but projects of 5 units or more were up 30.6 percent from November. Single family houses increased 4.1 percent.

There are a lot of permits outstanding for which construction has not commenced but this number has declined almost every month since August when 2,297,000 permits were outstanding. The number at the end of December was 1.882,000. This figure is confounded, however, by permits that may have been cancelled, abandoned, or have expired.