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Economic Note: Homebuilding Recovery Accelerating From Slow Start

By Patrick J. O’Keefe, Director of Economic Research


After pausing at the start of 2013, homebuilding’s recovery resumed in February.  Compared to January, construction starts increased incrementally and permits authorizing future construction notched a solid increase. Compared to a year ago, starts and permits were up 24.3% and 27.7% respectively.

View accompanying charts.

Between 1992 and 2001, homebuilding’s generally upward trend was only occasionally (and briefly) interrupted. [Chart 1] During that span, housing starts increased an average of 5% per year.

Over the next four years, starts accelerated to the second highest on record – outstripped only by 1972 – and reached near-frenzy levels toward the end of 2005.   

Starts then plummeted to a record low in the Spring of 2009. For the next two years, activity rose while tax incentives were available and contracted after they expired.

The recovery in residential construction began in May 20111, [Chart 2] the first of 12 consecutive monthly increases in starts.  And activity has continued to increase regularly since (up in 20 of the past 22 months). 

During the three months through this February, homebuilders started construction at a pace last seen in 2008, [Chart 3] when activity was still trending downward. Compared to the cyclic nadir (May 2009), starts are up 84.4%.

A particularly noteworthy aspect of homebuilding’s recovery has been the sharp rise in the share comprised of multifamily units [Chart 4], which has jumped to its highest proportion in more than a quarter century. 

During the recent rise, unlike the spike in 2009 (where multifamily was a growing share of a shrinking pie), multifamily has accounted for a larger piece of a growing pie.  And this is likely to continue given secular changes in demographics, worker mobility, and perceptions of homeownership.

Despite the increase in total starts over the past two years, starts in the three months through February were 56.2% below the prior peak. Relative to a more “normal” standard – the average of the five years preceding the building frenzy (1997-2001) – the most recent count is down 40.8%. 

The recovery appears to be gaining momentum, as is evident in the data on permits [Chart 5] (authorizations to start construction) which have been rising steadily, a sign of builders’ confidence. 

But while builders may be anticipating further gains, they are not getting ahead of the market. Instead, starts, completions, and sales [Chart 6] remain closely aligned, resulting in an inventory-to-sales ratio [Chart 7] that is low and declining. 

Homebuilders are managing in a market in which sales are rising generally [Chart 8]  but not robustly – and prices are increasing – but only gradually [Chart 9]. Builder sentiment, while much improved, is equivalent to mid-2006 (i.e., when the slowdown had just begun and few anticipated the housing market’s subsequent collapse).

Perhaps the most telling statistic, however, is on-site construction employment. [Chart 10] The recent acceleration in jobs gains [Chart 11] suggests that homebuilders have tangible reasons (viz., executed contracts) to pick up the pace of construction.

On the data, homebuilding’s recovery is on a solid footing but does not justify the euphoria displayed in some recent reports. Residential construction is coming back, but it still has a long way to go.

1Residential construction is subject to transitory factors (e.g., unusually severe weather) that may influence the data reported for a given month. To filter the noise created by such one-off events, this analysis utilizes three-month averages.


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