A strong residential construction number is a welcome relief for an economy struggling to hang on to expansion and a hopeful harbinger of better days to come. Caution, however, needs to be taken in interpreting the surprisingly strong top-line housing starts for September. Even with this caveat, there are signs that momentum is developing in homebuilding. Whether this momentum persists, however, depends on the economy staying out of recession. The strong September monthly gain was driven almost entirely by a surge in multifamily construction, which is typically a very volatile statistic. Single-family starts accelerated slowly, and the current pace remains weaker than at this time last year. Indeed, year-over-year comparisons of single-family housing starts have been sliding nearly nonstop since May 2010. Gains in construction may be limited to multifamily units, but strengthening apartment building is still a positive for the broader economy, employing construction workers and adding to the value of the nation's output. Further, even with volatility in the multifamily data, starts have increased steadily over the past two years to the current three-month average of 191,000. The comparable figure in September 2009 is 86,000. Steady gains in multifamily permitting suggest a solid outlook for this segment of homebuilding. Slow job growth and demographics favor rental demand and thus boost multifamily construction. The pace of single-family housing starts remains soft, but a small sign of improvement is evident; single-family permit issuance increased year over year in September, the second consecutive gain. The spring of 2010 is the last time starts increased in this manner. Demand for homes is still very weak, and the inventory of foreclosed homes is large, so it will be difficult for single-family homebuilding to maintain the gains in coming months. With the economy on the brink of another recession, uncertainty prevails in the minds of homebuyers and homebuilders, which will keep activity low. Foreclosures compete with new homes, and the number of distressed homes available for sale will increase in coming months as servicers step up the pace of processing foreclosures. The main positive for the homebuilding outlook is the dearth of new-home inventory, which keeps descending to new historic lows. Overall, however, the struggling national recovery will keep homebuilding weak until mid-2012, when better job and income growth boosts demand and a very small inventory of new homes induces more construction. Over this period, apartment building will outperform single-family construction. Celia Chen, Senior Director of Housing Economics for Moody's Analytics.
