July’s new residential construction data were released by the Commerce Department this morning, and the news was ugly—activity in almost every meaningful category was negative or flat.  Only multifamily starts showed improvement but that number was not statistically significant.  Both single family and multifamily construction remain at historically low levels.

The total number of new housing units permitted in July was 3.2% down from June, to an annualized level of 597,000.  Total new housing starts fell less severely, declining 1.5% to an annualized pace of 604,000.

Multi-family housing showed a decline in permits, breaking its two month “streak” of growth, but showed a growth reading of 6.3% in starts.  Single family permits were flat in July, an increase of 0.5% over June, while single family starts were down 4.9%.  Only the decline in permits for buildings with 5 units or more was statistically significant.   In other words, July continued the same tune heard all year.

If you expect a better song to emerge before the end of the year, the best hope is in multifamily, but we really expect it to remain about where it is for the rest of the year.

We expect multifamily starts to end the year at 157,000, up 36% over 2010, as multifamily emerges from the dungeon in which it has been imprisoned since the early 1990’s. That would mean that July’s level of activity is about right for the rest of the year.  On a seasonally adjusted basis, the headline numbers should show minor improvement.

The 52 year average for multifamily starts is 429,000, driven by its size in the 1960’s, 1970’s, and 1980’s.  While we don’t envision multifamily construction getting back to that size any time soon, multifamily construction does benefit from several strong tail winds: declining home ownership, household formation driven by the Millennial generation, and consumer psyche worried about future home values.

Looking at single family construction, we do not expect any improvement for the rest of 2011, barring some economic miracle that resuscitates job growth and pumps up consumer sentiment.  While multifamily benefits from declining home ownership, the net effect to new construction is that nationally we already have excess existing housing stock.

The level of activity we see now is purely in response to replacement of aged or destroyed housing stock and weak improvements in only the healthiest areas of the country.  It’s likely to remain this way until markets really see fundamentals improve, which hopefully will begin in 2012 for many key markets.  We will see that improvement first in home price stability and existing home sales, and then new single family construction will start to recover, one healthy market at a time.

Finally, I don’t expect last week’s announcement from the Federal Reserve of their intent to keep interest rates low for two more years to help the housing market near term.  Interest rates have been at historic lows since 2008.  If anything, communication that interest rates won’t rise will add additional reasons for consumers to remain on the sidelines until clearer economic stability and home price appreciation begin to emerge.

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