Housing Starts and Bank Profits

Homebuilders are getting busier. Housing starts rose 4 percent to 582,000 annualized unit pace in June, the highest six months and over 100,000 higher from the pace just two months ago. The construction of single-family homes advanced while that of multifamily units declined. But even with the latest rise, new construction activity is still down by 46 percent from one year ago. Recent prior months data were modestly revised upward.
At the bubblish peak in 2005, new home construction totaled 2.1 million units. So the current activity is only about one-quarter of the peak level. Clearly unsustainable then, but the four straights years of housing starts decline has translated into over one million job losses in the residential construction sector. The latest rise in building could arrest further job cuts in the sector.
Perhaps the worst is over. Home sales have been rising modestly in the past few months. The builders took our more housing permits, a good indicator of future housing starts. Still inventory of existing homes remain elevated and the builders will have difficult time competing.
GDP forecast is nudged higher because increased construction pushes up economic activity in the short-term.

Financial companies who received TARP funds are generating good profits. The credit market is therefore clearly healing. Improved health of financial companies is no doubt a good thing to assure plentiful credit to the marketplace over the long haul. But part of the rise in profit could be due to less competition and tacit collusion among the major lenders to get a fatter profit margin at the expense of consumers.
Short-term credit crunch still abound with interest rates remaining stubbornly high on commercial mortgages, jumbo residential mortgages, and for those wanting to buy a second homes. Also the pace of anti-foreclosure mortgage modifications has been sluggish.
Given that the survival of many of the financial companies were partly due to the taxpayer TARP funds, the financial companies should be cognizant of what is needed to get the economy back on track such as boosting staff to better process mortgage modifications and in approving short sales. These activities may be of lower profit margin, but they are for the benefit of the public, who had helped out the industry with TARP funds.

Builders getting a bit optimistic should be taken with caution. For a quicker return to a healthy market, both new and existing home inventory needs to be drained down. Inventory levels are still high at near 10 months. Many existing home prices are priced meaningfully below the construction cost. Therefore, many of the recent new home construction could come back to bite back the builders as they realize the need to lower prices in order to sale. The profit margins just may not be there to justify new construction.
Bank profits should lead to more hirings. Some relief could be on the way in terms of help on foreclosure mitigation and in approving short-sales. The better capital reserve should also permit more lending for non-government backed mortgages for jumbo, second homes, and commercial real estate.