The sharp rise in new construction last month lifts the level of starts to the highest number since February 2008. Another way to consider the data: starts are now running at about twice as high as compared with the number posted during the depths of the Great Recession. The pace of new construction is still roughly 50% under the high points of the housing boom, although some of that was simply excess building that had little if any economic rationale. In any case, it’s clear that housing has recovered quite a lot of lost ground since this market imploded a few years back.
The strong profile that emerges in today’s data minimizes the worrisome signs that had been casting shadows recently. The year-over-year figures for both starts and permits had been trending lower through most of 2013. It wasn’t clear if this was a maturing of the housing recovery or something darker. The future’s still uncertain, of course, but today’s numbers on starts suggests that new construction is in no danger of slipping off the cyclical cliff any time soon.
Although the annual rate of starts turned sharply higher in November, the growth of permits relative to the year-earlier number is closing in on the lowest pace since 2010. For the moment, this isn’t terribly troubling because the current year-over-year pace of around 8% still suggests a healthy round of growth for home building. In fact, that’s the message in this week’s December update of the National Association of Home Builders/Wells Fargo Housing Market Index, which jumped to an eight-year high. “This is definitely an encouraging sign as we move into 2014,” said NAHB Chairman Rick Judson earlier this week. Today’s news on housing starts only strengthens Judson’s outlook.
What’s the risk for housing? Higher interest rates… maybe. When the Federal Reserve starts winding down its stimulus program, rates will move northward. In fact, rates have already moved moderately higher in recent months in anticipation that extraordinary run of monetary stimulus is nearing an end. The 30-Year conventional mortgage rate is currently around 4.4% (based on the national average), or up from roughly 100 basis points since the Spring. For the moment, it’s not obvious that higher rates will damage the housing recovery. But much depends on how fast rates rise and why they rise. If the Fed is tightening policy because economic growth is picking up, that’s a healthy change. For the moment, that’s still a reasonable bet.