Wall Street Greek: Housing Starts

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Just last week, we promised you we would offer insight into the Housing Starts disappointment; though April's soft housing starts data did not bother us much. We believe the intricate dynamics of the construction/real estate investment business have simply pulled one over on the less than visionary among us. We, however, took careful note of the multi-family factor, and the contrast presented between it and single family stand alone housing.

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Housing Starts

The rate of housing starts sank to an annual pace of 458K in April, short of the consensus view for a level of 540K, as per Bloomberg's survey of economists. The fall was even steeper, considering that the previous month's results were revised up to 525K, from the 510K initially reported for March. Also, an indicator of future starts, Building Permits fell to 494K, down from the revised March figure of 511K.

Multi-Family Quirk

While the market worried about an apparent backslide for housing, we were soothed by an interesting aspect of the report. It seems single family housing starts rose across the country and in almost every major region. At the same time, multi-family housing starts, especially for structures of 5 units or more, dropped precipitously. So what do we take out of this then...

We know that during the bubble building years into the middle part of this decade, a building frenzy occurred. Real estate investors of all sorts, new and old, became intoxicated by home price appreciation. House flipping is the best evidence of this; folks were buying homes with the sole intention of selling them soon after for a quick profit. A lot of this occurred without major improvements being made to the properties. At the same time, a new construction frenzy spanned both single family and multi-family structures. But when things go bad and building stops, we believe there's logical reason for bigger projects to take longer to rev up anew.

Real estate investment can be a costly game, as developers take on the burden of debt to finance construction projects. Unfinished and idle property continues to cost the developer with each debt financing payment and each day a unit goes unsold. At the same time, bankers bear a big portion of the blow when developers leave empty projects to sink into the mud, and loan contracts to sink with them. Coming back from that kind of loss is not so easy... old wounds take time to heal and capital even longer to raise again.

Meanwhile, foreclosure property floods the real estate market with supply. Vacant homes available at low cost present a problem to the large multi-family developer. So, with an unsettled marketplace, who in their right mind would start a new project now? Not many it seems... The numbers tell the story.

Monthly Change in Housing Starts

	Total Starts		Single Family		Multi Family
April	-12.8%		+2.8%		-42.2%

By "Multi-Family," we refer here to structures of 5 units or more.

The Multi-Family Construction business seems to us a close cousin to commercial construction. While the end-market is different, we suspect investors/developers in commercial construction think like multi-family developers. So, we suspect that as goes commercial construction, so goes multi-family development. We venture to say it's more of a profiteer's game, whereas home building may have a more solid foundation. We also suspect that developers of single family homes expanded their businesses in the bubble years to include multi-family, and with the bursting of the bubble, contraction of that effort was likely first priority. Finally, when demand for housing wanes, it's logical that large housing structure blue prints be kept shelved.

The point of the article is to direct your attention to the growth in single family starts. It likely represents the ground bursting of another green shoot, and perhaps one you missed because of the impact multi-family starts had upon the overall results.