Don’t Be Fooled by the Rise in U.S. Housing Starts; Real Estate Is Still Headed for Recession

U.S. housing starts rebounded sharply in October, while building permits jumped to fresh 12-year highs, offering signs that the real estate market is racing back to health.

But as CNBC noted in its coverage of the monthly report, the rise in real estate activity largely coincides with a gradual decline in mortgage rates. Without this crucial ingredient, the housing recovery isn’t going anywhere.

Housing Activity Rebounds in October

The Commerce Department reported Tuesday that housing starts jumped 3.8% in October to a seasonally adjusted 1.314 million units, far exceeding forecasts of a 0.9% increase. The September data were revised to reflect a decline of 7.9% from 9.4% reported previously.

Single-family starts in October increased 2% to a 936,000 unit pace.

Building permits – a proxy for future construction plans –  increased 5% to a seasonally adjusted 1.461 million units. That’s the highest level since May 2007. Permits for single-family housing projects increased 3.2%, reaching their highest level since August 2007.

It wasn’t just starts and permits that rose in October; housing completions shot up 10.3% from the previous month to reach 1.139 million units. That’s 12.4% higher than year-ago levels.

Another Look at the Data

On the face of it, the Commerce Department’s report offers convincing evidence that the real estate market is on solid ground. After all, groundbreaking is positively correlated with demand, so higher construction activity means more people want to buy homes.

Then you look at housing activity over the past 12 months and quickly see that starts have declined six times. That includes a brutal three-month skid through the summer where starts plunged to a seasonally adjusted 1.204 million-unit pace.

U.S. housing starts have shown extreme volatility over the past 12 months. | Chart: tradingeconomics.com

Over the same period, building permits stagnated or declined a total of six times.

Building permits rebound sharply after…

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