Construction Down, Prices Up

Posted by: Peter Coy on June 1, 2006

So this is how the housing market cools. Demand softens. Builders cut back. But prices keep going up for awhile, almost like a car gliding to a stop long after you take your foot off the gas pedal.

Today the Census Bureau announced a 1.1% drop in private residential construction in April, the biggest decline since January 2004. Economist Ian Shepherdson of High-Frequency Economics notes that if you take out spending on home improvements and look at just new building, the drop was 1.3%, the sharpest since July 2000. Says Shepherdson: “Builders appear finally to be starting to try to reduce their rapidly-expanding inventory. This is a direct hit to GDP growth and it will only get bigger.”

Contrast that with the price report out today from Office of Federal Housing Enterprise Oversight. It says that prices in the first quarter rose a little over 2%, for an annual rate of increase of over 8%. Sure, that’s a slowdown from the double-digit rates of recent years, but it’s still a big gain. Mike Englund of Action Economics writes that “downside surprises from sales indicators are occurring along upside surprises in price of homes actually sold.”

Will prices flatten out and fall as the softness in housing demand becomes more and more apparent?

Reader Comments

Sally

June 4, 2006 8:47 PM

In Chicago, the developers & builders keep putting up new condos and converting rentals to condos. I don't see where the demand is coming from that would cause them to keep building like there's no tomorrow.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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