Top Regions For Homebuilding Recovery

By Investopedia Staff | March 17, 2010 AAA

Housing starts and building permits fell in February, according to the "New Residential Construction" report released March 15. Housing starts came in at a seasonally adjusted annual rate (SAAR) of 575,000, a decline of 5.9% from January's revised figure of 611,000, following the pattern seen since July of increases in one month followed by drops in the next.

Building permits fell 1.6% to 612,000 (SAAR), the fifth decline in the last eight months. The housing starts and permits numbers were negatively skewed by unusually fierce winter weather in parts of the country, but for which the figures may have confirmed that a nascent recovery in homebuilding activity is underway.

IN PICTURES: 7 Tips On Buying A Home In A Down Market

Best Performing Region
Of the four geographical regions by which U.S. housing starts and building permits data are grouped, the Midwest had the best performance for both starts and permits in February, with starts up 10.6% and permits rising 11.7% from the previous month. On an unadjusted basis, starts were up 19% for the first two months of 2010 from the year-ago period, with permits up 18.1%.

The Midwest has also seen the most consistent increases in building permits since July 2009, with growth in five out of those eight months. However, that consistency in permits issued has not translated into actual housing starts, with only three months of growth out of the past eight.

Go West
The West region was the second-best performer in February, with starts up 7.9% and permits down 2.1%. Unadjusted starts and permits were up 3.1% and 26.4% for the first two months of 2010 from a year ago. The West has witnessed the most consistent increase in starts recently, with five months of growth in the past eight. Growth in permits has not been as consistent, with only three months of increases.

The signs of stabilization are encouraging, however, given that this region encompasses some of the states that have been among the hardest hit by the housing correction, such as California, Nevada and Arizona. (Home price appreciation is not assured. Can you withstand the volatility in this market? Don't miss Why Housing Market Bubbles Pop.)

Stormy Starts
The Northeast ranked third, while the South recorded the worst performance for both starts and permits in February. With both regions hit by severe snowstorms, housing starts fell 9.6% in the Northeast and 15.5% in the South. Permits were unchanged in the Northeast, and declined 5.8% in the South. The Northeast has had the fewest down months in permits since July, with declines occurring in only two of the past eight months, and unchanged in two other months.

However, as with the Midwest region, actual housing starts did not match the consistency in permits issued with only three months showing growth. The South, on the other hand, has had five months of growth in housing starts over the past eight, making it quite likely that the plunge in starts last month may have been a weather-related aberration (since it is no easy task to break ground on a new house in the midst of a blizzard!). Permits in the South have only increased in three of the past eight months.

Single-Family Construction Stabilizing
Single-family homes comprise the lion's share of both housing starts and permits, accounting for about 87% and 82% respectively of the total in February. Single-family starts fell only 0.6% last month, compared with a plunge of 30.3% in starts for multi-family housing such as apartments. As well, single-family permits have averaged 504,000 monthly from December to February, compared with an average of 460,000 in the preceding five months.

Since there is a lag of about one month on average from the receipt of a building permit to commencement of construction, rising single-family permits in recent months should translate to increased starts in the months ahead. (Budgeting your living expenses doesn't have to put you in the poor house. Read Are You Living House-Poor? for some tips on efficient money management.)

Job Market - Another Indicator
The improving labor market may also signal a pickup in new residential construction activity in the months ahead. The economy lost only 36,000 jobs in February, and may have actually added jobs had the weather not played havoc on this front as well, preventing as many as a million people from getting to work in the employment survey week. Finally, the Federal Reserve's reiteration this week of its intent to keep interest rates low for an extended period may help the housing sector and residential construction.

The Bottom Line
With the West and South having recorded five months of gains in housing starts in the past eight, the outlook for new residential construction is positive, since these two regions comprise 70% of total U.S. housing starts. The increase in single-family permits in recent months also bodes well for stabilization of construction activity. Single-family permits remain more than 70% below their September 2005 record level of about 1.8 million, but at least the trend seems to be moving in the right direction.

Still feeling uninformed? Check out last week's Water Cooler Finance to see what's been happening in financial news.

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