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Economy in Brief

by Robert Brusca U.S. Housing Starts Drop by 2.1% but Appear to be Moving Sideways June 19, 2007

From January 2006 through October of that year housing starts fell fast and furious. But from October it has been a different story. Starts caught and rebounded through Dec 2006 then took weak again falling to a new local low in January of 2007. From there starts went on a three-month rise setting a plateau in place.

The chart tells the story. Housing is engaged in a move that appears to be more sideways than lower. It is still too soon to look for increases from the sector but the free fall of 2006 appears to be over. And although the outlook for interest rates is clouded, it is fair to say that even among those who look for further hikes few hikes are on the horizon - if any. The recent spike up and pull back in market rates shows how the market can be scared by events, but also how easily its faith has been restored. As a result interest rates do not seem poised to ruin this new picture of momentum that appears be more sideways in nature and may possibly have a further downward gradient in store but a mild one. We are building a base for increases in starts for late in the year.

Regionally the Northeast (NE) and Midwest (MW) are up in the month while the West and South are eroding.

Trends in the MW and NE have moved sharply higher and are almost certainly well overstated and likely to be reversed in coming months. The South and West - the two largest regions - continue to show accelerating deterioration in their respective trends. But trends in permits are more constructive, if less reliable.

The percentage changes in the table below show results by region. They show strength in the Northeast and Midwest but recent strength was so strong based on starts that it has left permit growth lagging and therefore casts suspicion on the strength. In the South starts continue to decline but the drops get progressively larger except for the recent month; and, in the most recent three months, permits are rising there. So despite weakness the South has some positives showing. In the West housing conditions are very bad with weakness accelerating although permits in the recent month did manage a rise.

The irony is that housing is strongest where the economy is weakest and vice versa. In the Midwest and the Northeast starts are strong while the economy is weak; but the economy is stronger in the West where housing is the weakest.

Housing dynamics remain complex. Mortgage problems and interest rate uncertainty still lurk as issues that the market must deal with as well as the housing sector’s accumulated stock of problem borrowers. After a run of strong house prices, these problems had been swept under the rug. Well now the lumps under the rug are showing. And excesses from boom times must be dealt with, but are not a matter to swerve economic policy. Housing now has its bright spots and problem areas. It is no longer possible to make housing a one-way bet on weakness. It has not turned the corner yet, but the slowdown in the slowdown is now apparent.

Housing Starts: Analytical Comparisons (Pct. Changes Not Compounded)
May 2007 Northeast Midwest South West
In 000's of Units Starts Permits Starts Permits Starts Permits Starts Permits
This month: SAAR 192 145 238 236 726 761 318 359
3-month AVG 162 155 223 234 743 746 362 374
1-mo. % chg 15.7% -6.5% 15.5% 5.4% -1.6% 5.3% -19.7% 1.1%
3-month % chg 43.3% 3.6% 46.0% 11.8% -9.0% -1.6% -18.9% -13.9%
6-month % chg 25.5% 0.0% 4.8% 2.2% -12.3% -4.9% -10.9% 2.3%
yr/yr % chg -2.5% -11.0% -17.9% -18.9% -23.1% -21.1% -38.0% -28.1%
year to date AVG % chg -14.8% -20.0% -35.9% -28.3% -24.9% -26.2% -26.5% -28.8%
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