Interest Rate Roundup

Tuesday, December 18, 2007

My thoughts on November housing starts

Sorry about the delay. I was taping two Fox Business segments on the housing market this morning. They focused on the outlook and impact of today's housing starts and building permits figures. So what did the numbers show?

* Starts fell 3.7% to a seasonally adjusted annual rate of 1.187 million units. That was down from a revised 1.232 million units in October, slightly better than forecasts for a reading of 1.176 million, and ever-so-slightly above the cycle low set in September (1.182 million).

* However, building permits continued to fall, slipping 1.5% to 1.152 million units. That was down from 1.17 million units in October and the lowest level since June 1993.

* By property type, single-family starts tanked 5.4% to 829,000, the lowest since June 1991 (shown in the chart above). Multi-family starts inched up by 0.6%. By region, starts fell in the Northeast (-16.3%), the Midwest (-1.5%), and the West (-6.9%), and rose slightly (+0.3%) in the South. As for permit issuance, single family permits dropped 5.6% to 764,000, while multi-family permits rose 7.5%. Permit issuance was down in two regions (Northeast, West) and up in two others (Midwest, South).

The numbers continue to show a subdued home construction market. We simply have too much housing supply and not enough housing demand -- and builders are responding by paring back. Some additional things to chew on:

* Builder sentiment remains in the dumps. The National Association of Home Builders index that tracks buyer traffic and sales activity held at a record low of 19 in December. It hovered around 70 during the halcyon days of 2003-2005. With traffic levels dismal and optimism on the wane, caution is going to be the watchword. In other words, builders are going to be reluctant to swing those hammers and fire up those bulldozers.

* We have too many homes for sale. If you look at the existing and new home markets together, you see we have around 2 million to 2.5 million more homes on the market than we typically had at any given time in the pre-bubble days.

Meanwhile, census bureau figures show the homeowner vacancy rate – the percentage of homes for sale that are empty – is running at 2.7%. That’s just shy of the Q1 record of 2.8%. Before the bubble popped, the vacancy rate never rose above 2% (the Census Bureau started tracking this back in 1960). That is yet another data point showing that home supply is ample to meet America's housing needs for the near-to-intermediate term.

* Lending standards are tightening. Two-thirds of banks surveyed by the Fed recently are making creative mortgages harder to get, while roughly four in ten banks are tightening lending standards on prime-credit mortgages. That’s going to make it harder for new borrowers to get financing.

The FHASecure program announced at the end of August will help about 50,000 borrowers refinance this year, preventing or postponing some foreclosures. Additional FHA reforms being hammered out in Congress right now -- plus private-sector modifications -- will also help some borrowers avoid foreclosure. But we’re still looking at 2 million potential foreclosures in the next two years (per the Center for Responsible Lending). That's another major source of supply in an oversupplied market.

One last thing to consider: Most economists are looking for starts to bottom out in the 1.1 million to 1.25 million area sometime in early 2008 -- in other words, right around where we are now. But in the previous four substantial housing market downturns since the 1960s, starts fell an average of 60% peak-to-trough. Through November, we're down about 48.2% from the peak (2.292 million starts in January 2006). Therefore, from a purely historical perspective, this downturn could have further to go. A 60% decline from the peak would leave starts in the low-900,000 area. It's not really a forecast ... more like food for thought.


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