Residential Construction Continues to Struggle

A sluggish economy, a soft job market, a large inventory of foreclosed homes, the threat of additional foreclosures, and difficulty in obtaining financing for both potential homebuyers and for builders continue to act as a drag on the housing market. In spite of these factors, some glimmers of hope have appeared recently. Housing starts rose 15% in September from August. Much of that gain was due to ever volatile multifamily starts. Single-family starts at worst are bouncing around a bottom of about 420,000 units. Meanwhile, single-family permits are holding their own at 417,000. The National Association of Home Builders (NAHB) October Housing Market Index (HMI) rose from 14 to 18, the highest it has been since a reading of 22 in May of last year. Particularly heartening was that the HMI for the West jumped from 12 to 21, its highest reading since August 2007. The HMI for the South was up from 15 to 19. Together, the West and the South account for roughly three-quarters of national housing starts.

Lower long-term interest rates from the Federal Reserve’s Operation Twist will provide a mild lift to the housing market, although tight lending standards remain a problem. If the national economy produces at least 100,000 net new jobs per month (at an annual rate) as we fully expect, the housing market will begin to trend upward and build some positive momentum. Regardless, the outlook for multifamily housing projects looks bright in the near term as vacancy rates fall and rents rise.

New residential construction spending has been inching upward for the past three months. In August, it advanced 1.3% to $128.7 billion, its highest level since February. The forecast is for residential construction spending to fall 6.0% in 2011 and then rise 2.1% in 2012 and 7.3% in 2013.