Home Building Activity Drops Sharply

MBA (4/17/2008 ) Velz, Orawin
Total housing starts fell 11.9 percent in March to a seasonally adjusted annualized rate of 947,000. Single-family starts dropped 5.7 percent. This is the 12th consecutive decline in single-family homebuilding, which has now reached the lowest level since January 1991.
Multifamily starts were down 24.6 percent, more than offsetting the 11.7 percent increase in the February. Both starts of 5-and-over units and 2-4 units decreased 23.1 percent and 24.7 percent, respectively. Total housing starts dropped in every region: 21.4 percent in the Midwest; 12.6 percent in the South; 8.5 percent in the Northeast; and 5.7 percent in the West.

Through the first quarter of this year, single-family starts were 39.0 percent lower than those in the first quarter of 2007. By contrast, multifamily starts for the first quarter of 2008 were 6.6 percent higher than those last year.

Even with the sizable pullback in single-family homebuilding activity over the past two years, the new home market continues to show considerable imbalance. While the number of new homes available for sale dropped steadily over the past year, the months’ supply or the inventory-sale ratio for new homes remained near 10 months in February. (The March new home sales report will be released on April 24th).

The reason that the months’ supply has not improved despite the steady cutback in housing starts was because housing demand has fallen just as much as builders cut new construction. According to the National Association of Home Builders/Wells Fargo Housing Market Index released on Tuesday, home builders’ confidence during April continued to hover around record low levels reached in December 2007. Builders reported some improvements in traffic through their model homes from the end of last year but noted that increased traffic has not translated to sales.

Given the huge overhang of unsold inventory and sluggish housing demand, a continued decline in housing starts is necessary to reduce the market’s excess supply. Permits—a leading indicator of starts—suggest that further declines in activity in the coming months. Total permits fell 5.8 percent in March to 927,000 units. Single-family permits dropped 6.2 percent, marking the 12th consecutive monthly decline. Both total and single-family permits have declined to the lowest levels since January 1991.

A separate report showed that both the overall and the underlying (core) retail prices picked up in March. The Consumer Price Index (CPI) rose 0.3 percent after a flat reading in February. Excluding the volatile food and energy items, the core CPI rose 0.2 percent, compared with unchanged core prices in February. From a year ago, the core CPI was up 2.4 percent, accelerating from 2.3 percent in February. Other measures of prices released earlier, including the Producer Price Index and import prices, showed significant pickups in March.

Another report showed a modest rebound in the nation’s output at factories, mines and utilities. Industrial production was up 0.3 percent in March, following a 0.7 percent drop in February. All three categories that comprise industrial production increased during the month, with mining and utility outputs seeing sizable increases and manufacturing output edging up 0.1 percent. For the quarter, industrial production was flat, the first time it has not shown a quarterly increase since the drop in the fourth quarter of 2006.

The report showed that capacity utilization, which measures a portion of plants in use and thus a gauge for inflation pressures, edged up to 80.5 percent from 80.3 percent in February. Despite the monthly increase, capacity utilization is about one percentage point below its recent peak last summer.

The yield on the 10-year Treasury note was little changed, staying around 3.58 percent by mid-Wednesday afternoon.