Housing Starts Cooling Off or Freezing?

by Douglas McIntyre | November 19, 2009 12:18 pm

Housing Starts Cooling Off or Freezing?

The U.S. Department of Commerce released its data on new housing starts this morning, and the news was unexpectedly bad. The rate fell 10.6% to a seasonally-adjusted total of 529,000 units, the lowest total since April and the biggest percentage drop since January.

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New starts in multi-family dwellings fell 34.6% and starts in single-family housing fell 6.8%. Compared with last year, housing starts are off by 30.7%. For the full year, however, new housing starts are up about 10% over 2008, and new building permits are up by the same amount.

The growth of new starts in the past several months has been mostly attributed to the federal tax credit of $8,000 for first-time buyers. The uncertainty during October over whether or not Congress would extend the program is probably responsible for the slowdown in new housing starts.

Now that the tax credit has been extended and more buyers will be eligible for a credit, housing starts are expected to pick up. Maybe.

The total vacancy rate of existing dwellings is about 5.5%, or about 2.7 million vacancies. Building more homes only makes that figure climb.

Homebuilders themselves are very negative. The National Association of Home Builders publish a housing market index every month. For this month, the index is 17. Any number below 50 indicates what builders consider to be a poor market. The index has not been above 50 since early 2006.

None of this is good news for curbing unemployment. Housing construction is typically a leading economic indicator, while unemployment is a lagging indicator. Until housing starts begin a steady rise, it is fair to assume that unemployment will remain high. Worse, the lag between increased housing starts and lower unemployment is historically 12-18 months.

In past recessions, the Federal Reserve has jump-started construction recovery by lowering interest rates. That can’t happen this time because interest rates are already near zero.

To get the housing market going again, buyers need to be convinced that they have a secure job and they need to be able to get credit. Neither of those conditions applies today, and may not for some time to come.

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Endnotes:
  1. Who Is the New Warren Buffett?: http://investorplace.com/experts/douglas_mcintyre/articles/warren-buffett-berkshire-brk-a-filing-13-f-wmt-bni.html
  2. Are Lowe’s (LOW), Home Depot (HD) Housing Barometers?: http://investorplace.com/experts/douglas_mcintyre/articles/lowes-stock-low-home-depot-stock-hd-earnings.html
  3. Winners in the Race for Federal Stimulus Dollars: http://investorplace.com/changewave-alliance/articles/infrastructure-spending.html
  4. Get your FREE copy here! : http://investorplace.com/order/?sid=XH3252

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