Housing Starts: It's Going to Get Worse


Starts on new homes plummeted to a 10-year low in July, exceeding Wall Street's prediction by 25%

Global financial markets were already in trouble on the morning of Aug. 16 when the Commerce Dept. announced that housing starts fell 6.1% in July to a seasonally adjusted pace of 1.381 million—the lowest level in a decade (see BusinessWeek.com, 8/16/07, "More Carnage on Wall Street").

Ouch.

The drop itself was not as much of a surprise as the size of the drop. Wall Street had been predicting a 4.6% decrease in July housing starts after a 2.3% rise in June and a 2.1% drop in May. But with home sales still sliding and credit tightening, demand for newly built homes is running low. Year-over-year, July housing starts were down 20.9%.

Single-family building permits, down 1.6% in July, were not any more encouraging than the housing-starts figures. Because they are less influenced by weather, permits are a less volatile measure of the state of the market and are a bellwether for future construction activity. The July decline in permits marked the 19th decline in the 22 months that housing has been in recession.

"As bad as July's numbers were, they are bound to get worse in the next one to three months because of the turmoil in financial markets today," says Patrick Newport, an economist at Waltham (Mass.)-based Global Insight. "A mortgage is getting harder to get, especially for those who cannot qualify for prime loans."

Builders Losing Confidence

Fears about tighter credit in the wake of the subprime crisis have shaken the financial markets this past week. On Aug. 6, American Home Mortgage became one of the largest major lenders to file for bankruptcy when banks cut off funding for the company. On Aug. 16, mortgage lender Countrywide Financial (CFC) reported that it would need to rely on an $11.5 billion credit facility to fund its operations. In the previous week, central banks in the U.S. and Europe have injected money into the markets to help stabilize the credit markets.

Unfortunately, recent news about the housing market has not provided any indication of an imminent recovery. Homebuilders in particular are losing confidence. "Weakness in the housing-starts numbers confirms the fact that the housing market is really stuck in a downturn," says Celia Chen, a housing economist at Moody's Economy.com. "Builders are looking at the credit markets and seeing that credit is tightening, which means that demand is going to weaken. So they're not going to accelerate their building." Moody's Economy.com is predicting that starts will pick up in the beginning of 2008, but Chen admits that outlook could "easily be revised downward" if mortgage market problems persist.

On Aug. 15, the National Association of Home Builders (NAHB) reported that the NAHB/Wells Fargo Housing Market Index had declined two points in August to 22, its lowest level since January, 1991—which also happens to be the worst month for housing starts in history. Derived from a monthly survey, the index gauges builder perceptions of current single-family home sales and sales expectations for the next six months.

NAHB Chief Economist David Seiders now estimates that housing starts will not begin to recover until the third quarter of 2008.

"We've got one heck of a decline in starts behind us, and it's certainly true that the mortgage finance problems have been sort of piling on since earlier this year and that problem just is starting to mushroom," says Seiders. "There's very little that we have in hand that is positive."

Roney is Real Estate writer for BusinessWeek.com.

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