Housing is looking just fine, thank you very much

November 26, 2013
The recovery remains underway. (REUTERS/Kevin Lamarque)
The recovery remains underway. (REUTERS/Kevin Lamarque)

We asked earlier this morning if higher interest rates are killing the housing recovery. The answer provided by the latest data out Tuesday morning? A resounding 'No.'

The Commerce Department said Tuesday that the number of permits issued for new housing soared in September and October (the two months were released simultaneously due to the government shutdown). In August, builders took out permits to build new houses at an annual rate of 926,000 -- a number that rose 5 percent in September and 6 percent in October, leaping to 1.03 million. That is the highest since the summer of 2008.

Meanwhile, the S&P/Case-Shiller home price index for 20 major cities rose 0.7 percent in September, and is now showing a 13.3 percent gain in home prices over the past year. That means that higher borrowing costs don't seem to have depressed home prices yet.

There are some important caveats to the good news. On the home price survey, the rate of price increase was lower in September than in August in 19 of the 20 cities, suggesting there is at least some drag on the home-price recovery.

And, importantly, the rise in home-building activity was entirely concentrated in larger structures, buildings with five or more units. The number of permits for single-family homes actually fell slightly from August to October, while the number for larger buildings soared 40 percent, or more than 111,000 annualized units. Multi-unit buildings are disproportionately meant to be rental properties, not for purchase, which means they are less vulnerable to higher mortgage rates (though borrowing costs for commercial real estate loans rose alongside those of their residential counterparts).

If you squint at that data, you can see a coherent story. Higher mortgage rates may have lowered builders' enthusiasm for constructing single-family homes. But they see no reason to doubt continued rising demand for rental properties of the sort that tend to be larger buildings with five or more units.

Economically, it's worth adding, that distinction shouldn't make that big a difference. Residential investment has been the missing element from overall growth over the last five years, and for the overall economy, a construction worker on the job putting drywall in an apartment building is just as valuable as a construction worker doing the same in a single-family home. (The per-unit investment involved in rental properties tends to be lower than stand-alone houses, but one can adjust for that).

Add up the good news on permits and the solid results on home prices, and this looks like a housing sector that will keep on plugging in 2014.

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Lydia DePillis · November 26, 2013