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It looked like there was finally a bit of good news in the housing sector, when the government on June 20 announced a rebound in home construction for May. But dig into the data, and the picture for housing is only getting worse. Permits for construction—a better indication of where the market's headed—continued to decline. Homebuilders are getting increasingly pessimistic, according to a survey that was released June 19 and is more up-to-date than the government data. And homebuilder stocks are continuing to slump.
First, let's look at the number that got people's hopes up. The Commerce Dept. said that starts of construction on privately owned housing units in May, adjusted for seasonal factors, rose 5% from their April level to an annual level of 1.96 million. That seemed to indicate that housing construction had touched bottom, or that it was at least trending down very gradually, with plenty of ups amid the downs. "The starts number is a good sign," says Jeff Lyons, general manager of RealEstate.com, a Web site for home buyers that is owned by the LendingTree unit of InterActiveCorp. (IACI)
But you shouldn't take too much comfort from one month's numbers. One reason for the May bounce was that the April numbers had been depressed by bad weather in places. On the West Coast, for example, starts rose 16% in May from a weak April, notes the economic analysis firm of Action Economics (see BW Online, 6/21/06, "Housing's Steady Foundation"). The South also had a healthy rebound.
BLEAK FOR BUILDERS. What's more, forward-looking indicators are weaker. Permits were down 2.1% in May from the April rate, not to mention down 8.5% from May, 2005. It was the fourth straight monthly drop. That implies that housing starts, which come after permits are issued, will be lower in coming months.
Homebuilders know better than anyone how strong or weak the market is. And their confidence fell this month to its lowest level since April, 1995, according to the National Association of Homebuilders/Wells Fargo Housing Market Index. The index fell to 42 from 72 a year ago. The association attributed the decline to "rising mortgage rates, deepening affordability issues, and the retreat of investors/speculators," who bought houses when the market was going up and are dumping them back on the market now.
The Federal Reserve, under Chairman Ben Bernanke, is expected to raise interest rates one more time when Fed members meet on June 29. That would be the 17th straight quarter-point increase in the federal funds rate, bringing it from 1% to 5.25%.
Writes Global Insight, an economic consulting firm: "Given the recent buildup in inventories, and the drop in builder confidence, further declines in starts are inevitable, despite May's smart rebound."
SHARES FOR SALE. How bad is this? David Seiders, the homebuilders' chief economist, argues that it's not terrible. He says the latest confidence reading "is not inconsistent with the reasonably orderly cooling-down process we're projecting." The organization expects new-home sales to fall 13% in 2006 from their 2005 record, while single-family starts will be down about 9%. Starts will fall less than sales because of "large builder backlogs of unfilled orders and some continuing reconstruction in the wake of last year's hurricanes," Seiders figures.
On the other hand, investors in homebuilders aren't too impressed by Seiders' "orderly" cooling. They're continuing to sell the market down. On June 20, Centex (CTX), D.R. Horton (DHI), KB Homes (KBH), Lennar (LEN), and Pulte Homes (PHM) all closed lower than the day before. All of their stocks are down between 35% and 50% from their peaks last year.
If you're looking for truly good news on housing, it's that foreclosure rates remain reassuringly low. The Mortgage Bankers Assn. said on June 19 that just under 1% (0.98%) of all loans were in foreclosure as of the end of March, vs. 0.99% at the end of December. Foreclosures are low because the economy has been strong, enabling most people to keep up with their payments. And because home prices have been rising, even those people who fall behind can usually get enough money from selling or refinancing to cover their debts. If prices fall or unemployment rises significantly, foreclosure rates could switch from being the silver lining to the dark cloud of housing.
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