U.S. housing starts and building permits each fell to record lows in October, which economists say is bad news in the short term. However, the quicker housing activity declines, the quicker excess inventory will be cleared off the market and the housing sector can normalize, they say.

U.S. housing starts, a measure of the number of homes being built, fell 4.5% to an annualized pace of 791k in October. The drop pushes the index, which dates back to 1964, to its lowest level on record, according to the U.S. Department of Commerce. Building permits, which are looked at to gauge housing economy performance in upcoming months, registered an even steeper 12% fall to 708k.

"The only positive thing to say here is that activity can't fall much further because there won't be any activity at all soon," said Paul Ashworth, senior U.S. economist from Capital Economics.

HFE's Ian Shepherdson added, "Housing activity seems to have taken another hit since the stock market plunge, along with most of the rest of the economy. With construction at these levels, the inventory/sales ratio for new homes ought to drop quite quickly over the next few months, setting the scene for an eventual stabilization in prices, but right now housing is a disaster area."

Single-family homes - the most important component in the report, accounting for four-fifths of housing starts - fell 3.3% to 531k, compared to the previous month's 549k. Even worse, single-family permits declined 14.5% in the month, falling to 460k in October from September's 538k.

The low level of permits is further reflected in the dismal results from the NAHB measure of builder confidence released on Tuesday. According to that index, builder confidence in November fell five points to a reading of 9, down from an already record low of 14 in the prior month. The series goes back to 1985.

The housing market has played a central role in the ongoing credit crunch, and BMO's Sal Guatieri said a broader recovery won't take place until the housing sector is restored. "Without a stable housing market, economic and credit conditions will likely get worse before they get better," he said.

The market basically shrugged off the report. Sireen Hajj, associate at Calyon, noted the data release coincided with the October CPI figures, which showed more deflation than expected. "However, market reaction to the figures was mixed with bond prices moving lower on balance following the release. The currency market impact was relatively muted," Hajj said.

The next indicator of U.S. housing will be the release of the Existing Home Sales Index on Monday.

By Patrick McGee and edited by Nancy Girgis
©CEP News Ltd. 2008