Best Financial Markets Analysis Article Starts of new homes fell 4.3% to an annual rate of 529,000 in December. Although builders broke ground for the construction of new multi-family units (+18%) in December, single-family starts declined 9% to an annual rate of 417,000. The level of housing starts is close to historical lows (see Chart 1) and the January Home Builders Survey (Composite index has held steady for three straight months) suggests that builders are not optimistic about the near term outlook for home building activity.

The positive aspect to note about home construction is that the annual average of single-family starts rose 6.6% to 472,000 in 2010, the first gain after four consecutive annual declines (see Chart 2). The first-time home buyer credit program provided a small lift to home construction during 2010. As shown in chart 2, single-family housing starts have posted significant gains during each year following a recession (or the year after) with the exception of 1961. This time around the increase in housing starts is relatively small, following a stretch of sharp declines, and is partly due to external support.

Another positive element is that permit extensions rose 16.7% in December to an annual rate of 635,000 (see Chart 3), reflecting a 53.5% jump in permits issued for multi-family units and a 5.5% increase permits for construction of single-family units.

Is the sharp increase in housing permits extended in December the beginning of a new trend? It is premature to make a firm conclusion. However, the December Architectural Billings Index for residential housing sends a bullish signal. The Architectural Billings Index of the residential sector rose 10.7% during December. There is a strong positive correlation of this index (advanced five months) with housing starts (see Chart 4), implying that housing starts could move up in the early months of 2011.

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com

Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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