Signs of steadily improving conditions in the housing industry are emerging, although progress is taking the two-steps-forward/one-step-back approach with broad swings between increasing and declining activity. This ongoing instability in new residential construction reflects month-by-month changes in home buyer confidence, according to David Crowe, NAHB's chief economist. Housing's path back to health will continue to be a bit bumpy, but eventually it will arrive in relatively good shape.
Overall residential construction permits declined in November to a seasonally adjusted annual rate of 544,000, increased 13 percent in December, and slid 10.4 percent in January to 562,000. Permits for multifamily buildings (five or more units) followed the same pattern, falling 22.4 percent in January from the previous month. Single-family permits experienced two months of small increases, but then declined 4.8 percent in January to a rate of 421,000, about 17 percent below the previous year.
After a moderate gain in November and a slightly less moderate loss in December, single-family housing starts slipped by 1 percent in January to a rate of 413,000—19.2 percent below the rate of January 2010. Multifamily starts leaped ahead 80 percent in January after a solid increase in December to a rate of 171,000, which pulled the number for overall starts in January up to 14.6 percent.
Completions fared poorly across the board, with single-family declining by 7 percent in January after a slight increase in December. However, single-family completions were only 2.7 percent below the rate of January 2010. After increasing in November and declining in December, multifamily completions fell again by nearly 20 percent in January—62 percent below the previous year's rate.
The multifamily sector's erratic behavior is in part due to sampling variability in the statistical process, but there is healthy demand for rental apartments. "That sector has a lot of promise," Crowe says. "What seemed to have retarded it in Q4 2010, and gives me some concern, is the builders' ability to get the financing necessary to build to the expected demand. We have a good forecast for rental demand, which should mean good forecasts for rental supply—but it will be contingent on banks opening their doors to builders."
Crowe expects that new residential construction will stabilize during 2011 and projects a 17 percent increase in construction over 2010's activity. "The overall economy is beginning to cure on a consistent basis," says Crowe. "We've had improved economic output for six straight quarters now, although it hasn't been consistent enough to convince the average American that it's here to stay. However, we'll get some consistently positive reports in coming quarters, and that will give consumers the confidence they need to go forward with something as major as a home purchase."
The high-end and custom markets are likely to improve at a pace similar to that of production housing and the overall economy, he notes, because both markets in part rely on buyers and clients who already are homeowners and who usually must sell their current home to invest in a new one.
The American Institute of Architects' (AIA) Architectural Billings Index, which tracks ahead of commercial real estate investment (and includes investment in residential projects and development), scored lower in January than in December, slipping nearly 4 points to a score of 50. However, remaining above the 50-point baseline is an indication of overall stability in demand for design services, according to the AIA, despite still-weak conditions.