Housing: Recovering or Not?

Just as optimism began to bloom, U.S. housing starts hit a record low. The homebuilding sector may have to endure a long bottoming process

Construction workers build a house May 19 in Las Vegas. The Commerce Dept. announced that construction of new homes and apartments fell 12.8% last month to a seasonally adjusted annual rate of 458,000 units. Ethan Miller/Getty Images

By Ben Steverman

Hopes are high that the deeply troubled U.S. housing sector has finally seen the worst of the recession and financial crisis.

But new data on May 19 raised questions about that optimism. U.S. housing starts hit a record low, dropping 12.8% in April, to an annual pace of 458,000. Housing starts are down 79.8% from their peak in January 2006.

A sharp drop in construction of multifamily dwellings drove the reading, with single-family starts actually up 2.8%.

However, the overall record low disappointed economists and investors, who had seen signs in recent months that housing might have hit bottom.

With housing starts at a record low, "it's early to pop the cork," says Michael R. Englund, chief economist for Action Economics. Yet, Englund and other economists told BusinessWeek, the data don't contradict hopes that housing might be near a bottom.

"in the process of bottoming out"

A drop in construction activity is certainly troubling for the overall economy and for unemployment trends. But a drop in housing starts might actually be good news for the sector's eventual rebound, says Gary Wolfer, chief economist at Univest Wealth Management (UVSP).

One of the housing market's main problems is a glut of supply—too many homes for sale. Idle homebuilders mean fewer new homes coming onto the market, thus hastening a bottom for the market. "We're getting there in a brutal fashion," Wolfer says, but at least we're "in the process of bottoming out."

Keith Hembre, chief economist at First American Funds, worries that further home foreclosures could continue to drive the proliferation of "for sale" signs across the country.

However, he does see reasons to hope for a revival in demand. The government is helping: Low interest rates make mortgages more easily affordable (if you can qualify for one) and the federal government is providing an $8,000 tax credit in 2009 for first-time home buyers. "The signs are there that demand has generally hit bottom," Hembre says—and it may even be improving somewhat.

A recovery start for homebuilders?

First-quarter earnings reports from homebuilders have bolstered the case for guarded optimism.

"For the homebuilding industry, we think that probably the worst is over," says Kenneth Leon, a Standard & Poor's equity analyst who covers the homebuilders. Key metrics seemed to improve in the homebuilders' first-quarter earnings reports, Leon says, including net orders, backlog, and the pace of homebuilder write-offs.

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