Yes, Housing Starts Surge, but Rentals Are the Drivers

By Diana Olick, CNBC Correspondent

NEW YORK (CNBC) -- The headline number for housing starts was big, exceeding expectations and sending the home builder stocks on yet another tear.

Starts hit 894,000 (annualized) in October, over 50,000 more than the analysts forecast. Housing starts are now at their highest level since July 2008.

"We expect the builder equities will react positively initially, but then fade through the day once the report is fully digested as 'multifamily' was the key driver of the results," warned Stephen East at ISI.

There is no question that home builders are benefiting from tight supply in the existing home market and overall improved consumer confidence. That was apparent in the home builder confidence numbers released this week, which hit the highest level in six years.

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Single family housing starts hit historic lows and are now just rising from the ashes. That is why some of the comparisons, like single family starts (up 35% from a year ago), sound so monumental and push the stocks higher. But investors need to keep these numbers in perspective.

"Housing starts at 894,000 is near where they were at the depths of the 1981 and 1991 recessions and 60% below the peak in January 2006," pointed out Peter Boockvar at Miller Tabak.

The October numbers were driven entirely by multifamily apartment starts, up 10% month-to-month and up 63% year over year. Why are developers putting up so many more apartments when housing is supposedly recovering? Because there is still big rental demand and low supply.

"The consensus view on supply remains that it is not a threat to apartment fundamentals in the near term. Overall, demand for apartments (driven by household formations) should continue to rise with deliveries, especially in high(er) barrier coastal markets," analysts at Cantor Fitzgerald said in a note.

There has been a lot of talk of increasing household formation, but what some fail to realize is that household formation can be a single family owner-occupied home or an occupied rental unit. Younger Americans are in fact moving out of their parents' basements, but many are moving into rental units, and that is also a formed household.

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