Housing market is coming back in a different form

The long downward slide in housing construction may be coming to an end.

While the rate of new building remains well below prerecession levels, construction permits for new housing increased slowly, but steadily, most of last year.

Not only is the housing market improving; it is also changing, with fewer single-family homes being built, and more apartment buildings.

Prior to the housing collapse, five to six times more single-family homes than apartment buildings were built each year. Today, the ratio is about three to one. If the trend continues, the housing market may be taking a radically different shape.

Housing has been a major drag on the economy since it collapsed. From early 2006, when the market peaked, to June 2009, when the recession ended, the pace of housing construction fell 75 percent.

In 2009, the number of new single-family homes completed dropped to 500,000, from a high of 1.9 million in 2006. For all housing units, including single-family and multiunit dwellings, the fall was similarly dramatic - from 2.2 million to 800,000.

Trends in housing construction are reflected in the interplay between new building permits and completed units. The number of permits issued approximates the number of new homes planned. But not all permits lead to completed houses. Even in the best of times, some buildings never get started and others are delayed.

When the market is booming, the number of permits is slightly above the number of units completed each month. This indicates confidence in future demand for homes.

The picture is different in a crisis. From mid-2006 to the end of 2009, applications for building permits dropped precipitously. Since some construction was already under way when housing collapsed, it made sense to complete many of those buildings. As a result, the number of permits issued fell below the number of housing units completed. This is a sign that builders are cutting back on planned construction, a symptom of oversupply in the market.

The slide in home building moderated at the end of the recession, but it has not yet recovered. Now the tide seems to be turning.

As of the end of last year, the number of housing units completed no longer exceeded the number of permits issued. Builders are applying for new permits and completing projects at about the same rate.

This rate is much lower today than it was prior to the recession, but we are no longer in crisis mode.

Housing construction has finally started to add to the overall growth in output - another sign of normalcy. New residential investment contributed positively, if modestly, to economic growth during the last three quarters of 2011. We have not seen growth of this kind since 2005.

Most of the increase in housing permits came from the construction of new apartment buildings. The number of new permits for multiunit structures has doubled since mid-2009, and permits exceed completions by a healthy margin. Nevertheless, apartments, like single-family homes, are still being built at a lower rate than prior to the recession, with about 150,000 multiunit buildings completed last year, compared with 280,000 units in 2006.

By contrast, the much larger single-family segment of the housing market still hasn't stabilized much. The number of new permits for single-family homes has stayed virtually constant since mid-2009, and the number of homes completed still slightly exceeds permits. This implies that builders are planning to build even fewer houses than they're building now.

Part of the reason is the large number of single-family homes already on the market. In December 2011, 2.1 million single-family homes were for sale - only slightly fewer than the 2.2 million available during the boom year of 2005. Back then, business was brisk. The demand today is much lower.

Housing construction may have turned the corner, but the new road appears to be headed for a high-rise apartment complex, not a neighborhood of neatly trimmed lawns.