Housing Bubble Watch: New Home Construction Reports
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Two monthly housing market indicators have been released so
far this week, both relating broadly to home construction and showing a continued
slowing of the housing sector and a related loss of builder confidence.
The U.S. Census Bureau and the U.S. Department of Housing and
Urban Development have published their joint report on
new residential construction for August 2006. The survey covers the number of
building permits, housing starts, and housing completions throughout the country
and it reported a further retreat in each category from the previous month and
double digit drops in two of the three categories since the same month in 2005.
Building permits for privately-owned housing units were issued at a seasonally
adjusted annual rate of 1,722,000 in August. This is a 2.3 percent decline from
the revised rate in July of 1,763,000 and is 21.9 percent lower than the estimated
rate of 2,205,000 permits in August, 2005.
Permits for single-family houses totaled 1,279,000 (annualized). The revised
figure for July was 1,325,000 representing a change of -3.5 percent.
The drop in permits since last year was greatest in the West where single-family
authorizations were down 31.2 percent compared to August 2005. All regions,
however, were down at least 20%.
Housing starts dropped 6.0 percent from July to August. The
revised annualized figure for the previous month was 1,445,000 privately-owned
housing starts which dropped to an estimated 1,665,000 in August. This month's
figure is 19.8 percent below the August, 2005 estimate of 2,075,000.
Single-family houses were started at an annual rate of 1,360,000 units, 5.9
percent below the revised July number of 1,445,000.
The West again showed the most damage year-over-year with single-family starts
down 33.4 percent. The South, however, was down only 9.9 percent compared to
August 2005.
Housing was completed during the month at a seasonally adjusted rate of 1,868,000
units, a drop of 3.2 percent from the revised July estimate of 1,929,000 and
4.4 percent below the same month in 2005 when 1,954,000 units were completed.
The reports authors note that care should be taken in interpreting the results
of this release as month-to-month changes can be irregular and not indicative
of a trend. They caution that it can take four months to establish a trend for
permits, 5 months for housing starts, and 6 months for unit completions.
The National Association of Home Builders and Wells Fargo just published the
Housing Market Index (HMI) for September. This survey measures
builders' confidence in and attitudes toward the housing industry. For the eighth
straight month the HMI dropped, this time from 33 to 30, putting
it at its lowest level since February 1991. The index has dropped 27 points
since the first of the year.
So the chicken and egg question. Are builders' attitudes driving their
behavior, making them pull back from requesting new permits (and perhaps at
an earlier stage of planning, not acquiring land or performing engineering,
etc.) or acting on permits they may already have in hand or are reports on permits
and housing starts and sales surveys negatively impacting their attitudes?
In any case, the Wells Fargo/NAHB survey measures builders' perceptions
about current single family sales and expectations for sales over the next six
months on a scale of good, fair, or poor and asks respondents to rate current
buyer traffic on a three point scale from very low to very high; responses in
these categories are then used to derive the overall HMI.
Builders' measurement of current sales was down five points to 32 and
expectations for sales over the next six months dropped four points to 37. Assessments
of buyer traffic were unchanged at 22. Any score in a given category or for
the index overall under 50 is considered to indicate negative perceptions and
expectations.
NAHB Chief Economist David Seiders commented that "builders are adopting an
increasingly cautious attitude in their near-term outlook for
new-home sales. They're experiencing falling sales, rising sales cancellations,
and increasing inventories of unsold units. And although many builders are offering
substantial incentives to bolster sales and limit cancellations, many potential
buyers are now waiting on the sidelines to see how the market shakes out before
proceeding with a home purchase."
"...long term housing fundamentals will be very favorable. In fact, the housing
market that emerges from this correction will have better balance
between supply and demand and will be able to ride on excellent underlying fundamentals
for years to come."
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