It's more crazymaking news. Consumer sentiment in May is down to its lowest level since 1980, says a University of Michigan/Reuters survey, likely due to depressed home values and runaway fuel costs.

Home builders also turned in their most pessimistic sentiment report in 23 years, according to the National Association of Home Builders.

Yet, with sentiment at its lowest, the Commerce Department reported that builders started 8.2 percent more new homes in April, with a whopping 36 percent increase in multi-family units.

Why would builders build more homes if the market is saying home sales and prices are in the dumpster?

Glad you asked. Explains Gopal Ahluwalia, director of research for the National Association of Home Builders, housing starts are volatile.

To put it simply, single-family homes are started one at a time. Multi-family is started as an entire community. Right now, there's greater demand for rentals because homebuyers are on the sidelines.

That explains why single-family homes are down 1.7 percent, the lowest level in 17 years, but multifmaily homes are up 36 percent. Before you get excited thinking you'd better move to a rental, multi-family housing starts were down 35 percent in March, which means that starts for spring are basically flat.

Housing starts are impacted by a wide range of factors from bank approvals to the weather, but mostly they depend on consumer sentiment, and starts have increased in three of the past four months to a seasonally adjusted rate of over one million annually.

But according to the NAHB, we still have a way to go before the nation comes out of its rental unit bunkers.

Short term demand is unstable. We're forming 1 million new households, about 300,000 below normal. At 1.3 million new households, we should have about two million new homes a year, but the industry is currently building only about 1.03 million.

The nation has lost 260,000 jobs in the first four months of 2008, which has a psychological impact on buyers, says Ahluwalia. Plus, they are certain there will be better deals to come.

On the other hand, long-term outlooks are good. Homeownership has declined one percent, a huge change considering that 69 percent of households once owned their own homes. Just based on immigration alone, we're adding 1.2 million people annually. With 11 month inventories to barrel through, it's a good thing single-family home sales are down. And rental demand is likely to continue as well.

Published: May 19, 2008

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