KEY DATA: Starts: +3.3%; 1-Family: +5.3%; Multi-Family: -1.6%; Permits: -1.4%; 1-Family: +1.4%; Multi-Family: -6.4%
IN A NUTSHELL: “Home construction is picking up steam and should boost growth this quarter.”
WHAT IT MEANS: For the past two quarters, a softening in home construction has restrained overall economic growth. It looks like that is changing. Housing starts rose in November, led by a surge in single-family activity. Multi-family activity ebbed, but this is an extremely volatile segment of the market and it was up sharply in October. So far this quarter, starts are running nearly 9% above the third quarter average, with both single-family and multi-family construction doing quite well. Looking at the November report, there were the usual oddities. Construction soared by double-digits in the West and South but dropped sharply in the Midwest and fell apart in the Northeast (it was down almost 40%). That just shows how wildly the numbers can swing and why you cannot look at just one month of data. Looking forward, the single-family segment is in for even more increases as permits hit a level not seen since September 2007. Total permit requests over the past two months were still running hotter than starts, indicating construction could be strong in December.
Yesterday, the National Association of Home Builders’ index was released and it indicated that developers are near giddy. The index is now above every reading we saw during the housing bubble. Indeed, the last time it was above the November level was in July 1999, 18.5 years ago! In other words, housing is in great shape, at least if you don’t live in high-tax, high-value areas. The tax bill doesn’t do any favors to homebuilders or homeowners in those areas.
MARKETS AND FED POLICY IMPLICATIONS: The data keep saying the economy is in good shape and soon, a potentially massive fiscal stimulus will hit the economy. How long it will take for the tax cuts to hit household wallets is unclear, but businesses will have the all-clear as soon as the bill is signed. But there are still lost of questions. For example, how much will actually be spent, how long will it take to see the additional spending, will labor shortages cause firms to raise wages to meet the growing demand and if so, will prices and therefore interest rates rise? Normally, expansionary fiscal policy is used when the economy is weak and needs to be kick started. This is not the case now. Alan Greenspan let the tech bubble build until it blew up and then he and his successor, Ben Bernanke watched the housing bubble burst and flatten the world economy. Will we see something similar from the next Fed Chair Jerome Powell? Stay tuned.