Housing starts in January hit their highest level in half a year, the Commerce Department reported (PDF) this morning—seemingly good news for those banking on a real-estate rebound. More specifically:
Privately-owned housing starts in January were at a seasonally adjusted annual rate of 591,000. This is 2.8 percent (±11.5%)* above the revised December estimate of 575,000 and is 21.1 percent (±12.3%) above the January 2009 rate of 488,000.
Single-family housing starts in January were at a rate of 484,000; this is 1.5 percent (±11.3%)* above the revised December figure of 477,000. The January rate for units in buildings with five units or more was 100,000.
There are a few reasons, though, to be proceed only with cautious optimism.
First of all, even though starts were up, building permits were down. Without the pipeline being refilled, January’s uptick could prove anomalous.
Second, housing starts are very volatile data and hard to pin down with much accuracy. Consider that last month we were told December starts fell 4.0%. Now the decline has been revised to just 0.7%. Also, as I’ve written before, the margin of error is so wide on these numbers that it’s actually possible that the true number of housing starts didn’t move upward. That’s what the little asterisk in the passage above means. In the words of the Commerce Department: “* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero.”
But there is a bigger cause for concern, too.
A new report from S&P quantifies how loans are going bad at a much higher rate than they are moving through the foreclosure process:
The monthly balance of distressed loans currently outstanding relative to the monthly balance of those that pay off, or close, suggests that there is a growing shadow inventory of loans that need to undergo the closure process. In January 2005, the balance of distressed loans outstanding was about 18x that of distressed loans that closed. Today, the balance of outstanding to closed distressed loans has increased to about 31x.
Part of that, the report authors write, is because of the push for loan modifications—many loans are happily moving from being delinquent to being current.
Yet even with the rate of people falling back into foreclosure on the decline, something like 70% of them still ultimately will. And when that happens, all those houses that are currently being kept off the market will start providing fresh competition for sellers, including home builders.
In other words, part of the rise in housing starts might be attributable to an artificial—and temporary—suppression of foreclosures. The S&P researchers conclude:
We believe that the recent constriction in the supply of foreclosed homes on the market is a temporary one. Loan modifications and the observed extension of time distressed loans remained as such may simply have delayed the inevitable, creating the demonstrated shadow inventory of troubled loans. Ultimately, the majority of the properties these distressed loans represent will likely have to be liquidated… We believe that the monthly rate of liquidations may rise in the near future, consequently prompting a decline in home prices.
