Housing Starts Review - 11/19/09

 Overall, the slow healing in homebuilding appears to have topped out in recent months. Total housing starts have been stuck in the 500,000 to 600,000 range all year, but this month they moved down from the higher end of that range. The single-family segment is by far healthier, but even single-family starts have flattened in recent months, after improving steadily in the first half of the year. The descent in multifamily construction is flattening, but there is still no sign of upward momentum. The outlook still calls for an improvement in starts, albeit a modest one, over the next several quarters. This outlook hinges heavily on the job losses abating and a good number of foreclosure modifications working.

The disappointing October residential construction report may result from the impending end to the first-time homebuyer tax credit. Buyers retreated from the new-home market as it became increasingly risky that a home sale would be completed before the tax credit was set to end on November 30. On this front, the extension and expansion of the tax credit will help over the next three quarters. Not only has the credit been extended to include homes that are contracted to be purchased by April 30, 2010, but it has also been expanded to include existing homebuyers. Income limits have been increased as well.

Other key drivers of housing demand are mixed. Mortgage interest rates remain low, house prices are low, and affordability is high—all forces that will help lift demand. However, credit availability is constrained and job growth is still absent. Further, foreclosures still weigh heavily on new-home demand, and the number of distressed properties on the market will only get worse before it improves.

One positive element of the October report is that completions increased for the first time in months, suggesting that builders are working through the improvement in orders over the past several months. Further, single-family starts and completions are running at about the same pace for the first time since the housing market began its collapse in 2006. During the correction, housing starts had fallen short of completions, a reversal from normal trends. The fact that completions are on par with starts indicates that builders have the capacity to ramp up starts—certainly inventories of new homes are low. The key question is whether the demand for new homes is there.