August housing starts increased 1.5 percent to 598,000, according to today's new residential construction report from the U.S. Census Bureau and the Commerce Department. Single-family starts slipped 15,000, while multi-family starts jumped 24,000. The single-family drop reflects a not unexpected brief pullback from the initial surge in construction spurred by the $8,000 tax credit for new home buyers. The multi-family jump includes some catch up after a random, below trend number of starts in July. Total housing starts remain on a modest but erratic upward trend into the winter.
Overall, the housing starts report confirms that the market is progressively strengthening. Permits increased 15,000 to the highest level since last November. Un-started permits continued to decline. This means that current starts are largely either units already sold or needed as model homes or homes available for a quick finish. The current starts level is sustainable because it includes few speculative homes. Generally, home builders lack the credit for speculative starts.
The number of homes under construction also continued to decline, dropping from 612,000 in July to 595,000 in August. Work in process is again consistent with current starts after being as much as 35 percent above starts over the last year. This signals that home builders have adjusted to the current, much lower size of the housing market. Operating conditions have returned to near normal, which improves access to credit and reduces the need for deep price cuts to raise cash.
The number of homes completed also dropped sharply from 804,000 in July to 760,000 in August. Some further cutback in completions is still needed in the next few months. But homebuilders have largely stopped adding to their unsold inventory.
There is now very little risk of a double dip housing recession in which rising foreclosures and falling jobs cause a sustained drop in housing starts in the next year. However, the still weakening labor market and a possible rise in the pace of foreclosures in the next year will restrain the housing recovery to well below the potential suggested by the near record high home affordability index. Reed Construction Data expects housing starts to increase from the current 590-600,000 level to about 650,000 early next year and over 750,000 by the end of 2010.
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Single-Family Housing Starts Up in July; Multi-Family Starts Drop