Housing starts: questions and answers

WASHINGTON — Housing construction is crawling out of its very deep hole, but no one expects it to reach the heights hit before the housing bubble burst — at least not for a very long time.

The Commerce Department released its monthly report on housing starts last week, saying they increased in September by a modest 0.5 percent to an annual rate of 590,000 new homes and apartments.

Applications for new building permits, however, fell by 1.2 percent to an annual rate of 573,000 units.

Here are some questions and answers about the housing starts report and what it says about the state of housing and the overall economy.

Q: What is a housing start?

A: The government counts a single-family home or multifamily dwelling such as an apartment building as "started" once the builder begins excavation of the foundation. The starts for the month are multiplied by 12 to get an annual rate. The figures are also seasonally adjusted because more homes are built in the summer than the winter. The report covers single-family homes, which make up more than four-fifths of the total, and multifamily units, which make up the rest.

Q: What has been happening to housing starts?

A: They have been on a wild roller-coaster ride. They surged into the stratosphere during the housing boom in the middle of the decade as cheap credit propelled sales of both new and existing homes to record levels for five straight years. To meet demand, builders ramped up production, pushing construction starts to 2.07 million units in 2005, close to the all-time high for housing starts of 2.36 million new homes and apartments constructed in 1972.

Q: What happened after 2005?

A: Housing has been in a painful, prolonged slump. Housing starts hit an all-time low this past April of 479,000 units at an annual rate, 79 percent below the peak month during the boom years. Since April, however, housing construction has staged a modest rebound, rising in four of the past five months, including the 0.5 percent gain in September that was reported this past Tuesday.

Q: So is that good?

A: Well, it is certainly better than the plunge in construction over the past 3 ½ years. The downturn in housing, accompanied by rising mortgage defaults, helped trigger the worst financial meltdown since the Great Depression and pushed the country into its longest recession in seven decades.

A rebound in housing is needed to help support overall economic growth — both directly, through the money spent to build new homes, and indirectly, through the support that increases in home sales provide to related industries such as appliance makers and furniture stores.

Q: What do economists expect will happen in coming months?

A: The September housing-starts report gave some mixed signals. Housing starts did rise, but the report showed that permits for new construction fell for the second month out of the past three. And analysts closely follow building permits as a good indication of future activity.

Analysts suspect the September permit decline was a payback from a jump in applications earlier in the summer, as builders rushed to take advantage of the government's $8,000 tax credit for first-time homebuyers. That program is scheduled to end Nov. 30.

Q: If the tax credit ends, what will happen to housing?

A: Real-estate agents and homebuilders are lobbying Congress and the Obama administration to extend the program for another year. But many economists believe the impact will be limited because they think most people interested in the program already have taken advantage of it. Regardless, they are forecasting a slow recovery in housing.