Homebuilding May be Losing Momentum

Written by: David Lereah   Tue, October 20, 2009 Beyond Today's News, Market Activity

Housing construction of new homes in the U.S. increased slightly in September, disappointing housing analysts who predicted a greater jump in activity according to a government report released Tuesday.

The Commerce Department said housing starts rose 0.5 percent in September to an annual rate of 590,000 units compared to a month earlier. The pace of homebuilding in September was 28.2 percent below the 822,000 unit pace established a year ago. 

All of the increase was due to a 3.9 percent jump in single-family starts which registered 501,000 annualized units in September compared to a month earlier. Single family construction in September is 8.7 percent below its year ago pace. Multifamily (apartments) construction fell 15.2 percent last month to an annualized 479,000 unit pace. Housing permits fell 1.2 percent in September from a month earlier. Housing permits are usually a reliable indicator of future residential construction activity.

This report is particularly troubling to industry observers because new information indicates that homebuilding activity may be losing momentum. Housing starts in August were revised sharply downward to 587,000 compared to a previously reported 598,000. Since June, new homebuilding activity has been flat, hovering at the 590,000 annualized starts mark. Although building permits were down 1.2 percent in September from a month earlier, single-family permits were down 3 percent from a month ago. Housing permit data does not portend favorably for future new home construction.

Multi-family construction activity has been volatile in recent months, rising almost 21 percent in August from a month earlier and then falling over 15 percent in September. The commercial real estate sector has been struggling in recent months and is not providing favorable conditions for new multi-family construction. Multi-family vacancies are on the rise, while rents are on the decline.

In other housing news, the National Association of Home Builders, NAHB, reported that its housing market index fell to 18 in October compared with an index value of 19 in September. The index is considered a leading indicator of home building activity. The slight monthly dip is consistent with the notion that homebuilding activity seems to have stalled. It is likely that homebuilders are less sanguine about the future because they are nervous about the likelihood of Congress extending the $8,000 homebuyer tax credit which is expiring at the end of November. Homebuilders may also be jittery about the slight monthly decline in existing home sales posted in September, fearing that sales of new homes may slow in the coming months.

Builders have other reasons to worry about their industry. The market is expecting a meaningful rise in foreclosure filings over the next several years due to planned rate resets on option ARM and interest only mortgage loans. A rise in foreclosures promises to increase the supply of existing homes which, in turn, inhibits new home building. Further, the economy continues to shed thousands of jobs on a monthly basis, inhibiting housing demand.

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