INDICATOR: February Housing Starts and Permits
KEY DATA: Starts: 897,000 (down 17%); Permits: 1,092,000 (up 3%)
IN A NUTSHELL: "Builders may not have been able to get the shovels into the ground in February, but with permits rising, they should be digging like crazy this month."
WHAT IT MEANS: The headlines will shriek, "Housing starts plummet!" So, should we worry? Of course not. If you cannot find a place to put the snow, it is pretty hard to move the dirt and builders didn't do a whole lot of that in February. Housing starts fell in every region of the country, but almost disappeared in the Northeast, where they were off a whopping 56.5%. It is hard to make the case that that decline was anything other than blizzard after blizzard after blizzard. The Midwest, which had bitter cold and snow, also posted a huge drop, with activity off 37%. Meanwhile, the West was down "only" 18% and the South a mere 2.5%. Yes, Virginia, there was a winter effect on construction. Indeed, the best way to view the state of the home building sector is to look at permits. Simply put, the days of speculative construction is behind us so when a permit is requested, there is likely to be some real reason to spend the money at city hall. Well, permits rose nicely in February despite a large fall off in the Northeast, where the government agencies were probably closed due to snow. More importantly, the gap between the level of permits and starts reached a near record level. Indeed, you can count on one hand the number of times in the last thirty years that permits requests had exceeded starts by the 195,000 units we saw in February. And the number of homes permitted but not started rose to the highest level in over six years. The February flop will be likely be followed by March madness.
MARKETS AND FED POLICY IMPLICATIONS: Builder confidence may have been shaken by the winter, as we saw with the decline in the Home Builders/Wells Fargo survey, but their actions belie their words. Developers don't take out permits unless they intend to use them and the level of permit requests point to further rises in home construction. So forget the headline and focus on the details and they scream winter, go away. Indeed, I just got back from my annual father/son trip to Clearwater to watch the Phillies spring training and four days of sun and low 80s has reminded me that the winter does eventually end. Better times are ahead and the March and April starts numbers should look really good. But will this report matter to anyone, given that the FOMC starts its two-day meeting today? Probably not. The recent data have been soft but if there is a message in today's numbers for the Fed it is that they shouldn't place too much value on the January/February data. The winter was brutal. Of course, that makes the job of convincing the markets that it is time to start the return to normal interest rates more difficult. But it shouldn't prevent the Committee for giving itself the flexibility to start when the time is right. Keeping "patient" in the statement makes no sense. When you consider that the Fed Chair meets the press only every other meeting and it really would be good if Chair Yellen did discuss any warning of impending rate hikes, the sooner the members get rid of any impediments to action, the better.