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By New_Deal_democrat September 18, 2014 10:36 am
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Housing: down m/m, but YoY trends show apartments still carrying the market

The first take from this morning's housing report was that it was poor.  Several reports have emphasized a big drop in multi-unit permits and starts.  As someone who came to the "Housing Slowdown" party early - i.e., at the end of last year, when most people were bullish, and who now believes that the bottom of the slowdown was early this spring, I see this report as consistent with some improvement in housing in the coming months.

First, a quick recap.  I turned bearish on housing late last year in the wake of sharply increased mortgage rates.  I thought that annualized housing numbers would likely at some point this year be down -100,000 or more.  Housing reports duly declined, and turned increasingly negative YoY in winter into early spring.  But interest rates declined from January into July, and by midyear were actually lower than they had been a year before.  Housing has slowly responded to these lower rates, as shown in the graph below, comparing the YoY change in housing permits (in 100,000's, blue) vs. the YoY% change in mortgage rates (inverted, red):

Including the data just reported this morning, there has been mild improvement in the YoY comparisons vs. earlier this year, and I expect housing to follow the positive trend in mortgage rates. 

Further, today's report only reinforces my view that it is multiunit structures - condos and apartments - that have been carrying the market. Again, to quickly recap, when housing didn't go down as much earlier this year as I thought it would, I went back and examined the data.  That convinced me that the difference between this year and most housing declines was the widespread entry of Millennials into the market - more specifically, into the apartment market.  Apartment and condo construction isn't as sensitive to changes in interest rates as single family homes.  Fifty years ago a tsunami of Boomers entered the market, and because multiunit dwelling construction was much more resistant to higher interest rates, building soared even in adverse conditions.  Now it is the similarly large (and down-payment-strapped) Millennial generation's turn.

Here are single unit housing permits (blue.left scale) compared with multiunit permits (red, right scale).  Note the scales are very different, because the monthly changes in multiunit construction are very small compared with single family construction:

Both of these look essentially flat since sometime in 2013, with perhaps a slight but very erratic uptrend in multiunit dwellings.

The trend is easier to see when we examine the change YoY:

Single family construction has been dead in the water all year.  In fact it was down YoY in this morning's report.  Multiunit construction is what has been carrying the housing market all year, keeping the slowdown from turning into a downturn.  And it continued to do so today's report.

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