Interest Rate Roundup

Wednesday, November 18, 2009

October housing starts, permits tank

We just got the latest data on housing construction activity. Here's a recap:

* Overall housing starts plunged 10.6% to a seasonally adjusted annual rate of 529,000 in October from 592,000 in September. That was much worse than the 600,000 units that economists were expecting. Building permit activity was also weak. Permitting activity dropped 4% to 552,000 from 575,000. Economists were expecting a reading of 580,000.

* By property type, single family starts more than reversed the strong gain in September, falling 6.9%. Multifamily starts tanked 34.6%, though it's worth pointing out how volatile MF figures can be. Single family permits dropped 0.2%, while multifamily permits fell 17.9%.

* What about the regional breakdown? Negative across the board for starts. They fell 8.5% in the West, 9.6% in the South, 10.6% in the Midwest and 18.8% in the Northeast. Building permit activity was marginally better, with declines of 5.8% in the South and 6.7% in the West. Permits were flat in the Northeast and up 2% in the Midwest.

Here's the housing mantra I want to keep repeating: "Three steps forward, two steps back." That is how I have said the housing recovery would play out, and that is, in fact, how it's progressing. The latest starts figures are no exception. Perhaps out of fear of the expiration of the home buyer tax credit, builders pulled back on both starts and permits in October. The hit was particularly severe in the volatile multifamily sector. But even the single family market fell in a ditch.

As bad as the monthly report was, however, starts are still above the absolute low for this cycle (479,000 in April for overall starts, 357,000 for single-family). Builders also have just 251,000 new homes for sale. That's the lowest level since November 1982, which tells me a pick up in construction is inevitable.

On the demand front, the tax credit has been extended and expanded. The Federal Reserve's manipulation of the mortgage market is keeping financing costs down. And improving affordability in many markets -- thanks to plunging prices -- is slowly bringing buyers out of the woodwork.

So yes, the bubble days are long gone. They won't be coming back for several years. But I still believe we will see a slow, steady recovery in sales ... a gradual decline in the number of homes on the market ... a tepid rebound in home construction ... and broad-based stabilization in home prices as we head later into 2010. Yesterday's NAHB report, and this morning's construction data, makes sense when viewed in that context.


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