US housing starts plunge to record low - New home construction falls by 12.8%

US housing starts plunge to record low - New home construction falls by 12.8%
By Alan Rappeport in New York
Copyright The Financial Times Limited 2009
Published: May 19 2009 14:07 | Last updated: May 19 2009 14:58
http://www.ft.com/cms/s/0/4ec2895e-4474-11de-82d6-00144feabdc0.html


New US residential building fell to the lowest level since 1959 last month, signalling that the stricken housing market could have further to fall.

Housing starts fell for the ninth time in 10 months, dropping by 12.8 per cent to an adjusted annual rate of construction of 458,000, commerce department figures showed on Tuesday. The decline dashed analysts’ expectations of an increase in new construction, but many took this as good news because the overhang of housing inventory needs to be slashed for a recovery to occur.

The monthly fall was entirely due to a steep drop in multi-family home construction, which plummeted by 46.1 per cent. Single-family housing starts actually rose by 2.8 per cent in April, suggesting a bottoming out in that segment of the market.

“In the multi-family segment of the market, the recession, specifically the battered labour market, has taken a clear toll on the rate of household formation, leading to diminished demand,” said Richard Moody, chief economist at Forward Capital.

On the year, housing starts have plunged by 54.2 per cent, as builders have been wary of breaking new ground amid plunging real estate prices. Last month’s drop followed a fall in new construction in March, when revised figures showed housing starts declined by 8.5 per cent. During the height of the construction boom, monthly housing starts peaked at 2.27m in January 2006.

“A weak starts number is good for the economy because it stabilises real estate prices,” said Mike Englund, an economist at Action Economics.

Home prices have seen record drops in the last year and remain nearly 30 per cent below their peak in July 2006. The National Association of Realtors said last week that the median price of an existing home fell by 13.8 per cent to $169,000 in the first quarter of this year from the same period in 2008. Foreclosures and distressed sales made up nearly half of all transactions in the first quarter and continue to rise as job cuts continue to spread.

Joshua Shapiro, chief US economist at MFR, said that the market for cheaper, single-family homes is beginning to bottom, but that the higher end of the housing sector remains bloated.

“We continue to believe that the overall median price of homes is going to continue to decline for some time,” Mr Shapiro said. “The bottom end of the market, however, will probably continue to show signs of life as long as first-time buyers can get the financing they need.”

Building permits, which signal future construction, fell by 3.3 per cent in April to 494,000, itself a record low. However, permits for single-family homes climbed by 3.6 per cent. On the year, building permits are down by 50.2 per cent.

The results on Tuesday came after a hopeful survey the day before that showed US homebuilder confidence rose to an eight-month high in May and has doubled since falling to a record low at the beginning of the year as buyers responded to new incentives to break ground.

The National Association of Home Builders’ index of homebuilder sentiment rose from 14 to 16 this month, in line with economists’ expectations. The figure remains 78 per cent below the peak of hopefulness reached in June 2005 when the index rose to 72. A reading of more than 50 indicates “good” conditions.

Ian Sheperdson, chief US economist at High Frequency Economics, notes that in spite of the recent signs of life, homebuilders are unlikely to ramp up production any time soon because the overhang of inventory remains so high. Moreover, the market for existing homes remains severely depressed because of widespread foreclosures.