The U.S. housing market is expected to give further proof of a long, slow-motion decline with the release of the housing starts & permits report from the Department of Commerce on Wednesday. The starts index could potentially fall to levels not seen in the 47-year index.

Housing starts refer to the number of homes being built and provide a sense of how the housing sector has performed in a given month.

The consensus expectation is for housing starts to fall to an annual pace of 780k, down from September's 817k rate. Expectations are all over the map this month, ranging from 700k to 870k.

When the pace of housing starts dipped below 900k in August, it was the slowest pace since January 1991. This month, that figure could fall below 798k, which would mark the lowest level ever recorded in the index, which dates back to 1962.

However, the forecasting team at JPMorgan said the market may be overestimating the decline in Wednesday's report. "Despite rough conditions and a supply-demand imbalance in the new home market, we aren't looking for a dramatic fall in housing starts for October," they wrote in a client note.

They explained that a 12% drop in single-family starts in the last report pushed the starts index below the permits index for the time since January 2007, which indicates that only a slight drop should occur in October. "The relatively high number of permits relative to starts may signal only a moderate drop in starts in October," they wrote.

Building permits - which are looked at to gauge housing economy performance in upcoming months - have been trending downward in previous months and are expected to continue that trend in October, which was the worst period so far in the 14-month credit crunch.

The consensus looks for the annualized number of permits to fall to 774k, down from 805k in September. Expectations range from 700k to 880k.

Wealth adviser Andrew Pyle from Scotia McLeod said a decline in housing starts & permits is probable, but that it's not all bad news. "The positive spin to this is that a further contraction in building will help restore balance between supply and demand in housing, with a hope towards price stability sometime in 2009," he said. "The trick is demand."

Even if the starts index doesn't plunge to new lows in this report, a new low is likely to be hit in coming months, as the latest data is far from encouraging that a turnaround will take place anytime soon.

On Tuesday, the NAHB builder confidence survey fell a huge five points to a reading of 9, down from a record low of 14 in the prior month. The series goes back to 1985.

BMO economist Jennifer Lee said that "no matter how much prices are cut and how many little extras are tossed in, possible buyers are staying clear away from the new homebuilders' sites."

The latest mortgage averages will provide little solace to homebuilders. According to, the rate for a 30-year fixed mortgage rose to 6.10% on Tuesday, up from 6.06% last week.

In a column in the New York Times on Tuesday, Treasury Secretary Henry Paulson emphasized the role of the housing sector in the ongoing crisis.

"I have always said that the decline in the housing market is at the root of the economic downturn and our financial market stress," he said. "And the economy, as it slows further, threatens to prolong this decline, as well as the stress on our financial institutions and financial markets."

In his testimony before the House on the same day, Paulson said the key to resolving the housing problem in the United States is more bank lending. He said the stabilization of Fannie Mae and Freddie Mac was critical, and also described the FDIC's widely acclaimed IndyMac protocol as excellent.

By Patrick McGee and edited by Stephen Huebl
©CEP News Ltd. 2008