Home Building Activity Drops Sharply; Wholesale Prices Surge

MBA (8/20/2008 ) Velz, Orawin
Total housing starts fell 11.0 percent in July to a seasonally adjusted annualized rate of 965,000. Single-family starts dropped 2.9 percent, reaching the lowest level since January 1991.
Multifamily starts were down 30.4 percent as multifamily starts plummeted in the Northeast reversing some of the prior month’s surge, the result of a rush to start building activity before local building code changes took effect in New York.

Total starts decreased 30.4 percent in the Northeast following a 103.2 percent jump in June. For the region, multifamily starts fell 44.1 percent, only partially offsetting the 229.8 percent surge in June. Starts dropped in the South and the West by 10.5 percent in each region and rose 10.0 percent in the Midwest.

Through the first seven months of this year, single-family starts were 40.2 percent lower than those in the first seven months of 2007. By contrast, year-to-date multifamily starts with 5 units and over were 19.4 percent higher than those last year. Year-to-date construction of structures with 2-4 units declined 41.4 percent.

Total permits fell 17.7 percent in July, driven by a 63.4 percent drop in permits in the Northeast as multifamily permits sharply fell. Single-family permits—a leading indicator for single-family housing activity—dropped 5.2 percent, the biggest decline since January. This marked the 15th decline over the past 16 months. Single-family permits fell in every region but the Northeast.

Another leading indicator of housing activity released on Monday showed that home builders continued to be pessimistic in August. The National Association of Home Builders/Wells Fargo Housing Market Index remained at record low in the 22-year history of the survey.

Housing starts should continue to trend down in the coming months. Given the huge overhang of unsold inventory in many parts of the country and soft housing demand, further pullbacks in housing starts are necessary to reduce the market’s excess supply. While the number of new homes available for sale dropped steadily over the past 14 months, the months’ supply for new homes remained as high as 10 months in June. (July new home sales will be released on August 26).

In its August mortgage finance forecast released on August 12, the Mortgage Bankers Association projected that housing starts will trend down and hit bottom in the fourth quarter of this year at 875,000 units (seasonally adjusted annualized rate), the second slowest quarterly pace in the history of the series. The record low was in the fourth quarter of 1981, with total starts at 873,000 units.

A separate report showed that overall wholesale prices surged in July, as the large decline in oil prices occurred after the survey period and therefore failed to have an impact. The Producer Price Index rose 1.2 percent, following a 1.8 percent increase in June and 1.4 percent rise in May. Large increases in energy prices, including electricity, heating oil and natural gas, led the overall increase. Over the past year, the PPI rose 9.8 percent, the largest gain since June 1981.

Excluding food and energy items, the core PPI was up a strong 0.7 percent following a modest 0.2 percent increase in both June and May. ,From a year ago, the core PPI rose 3.6 percent the largest gain since May 1991.

While the decline in crude oil prices since mid-July should help moderate the overall August PPI, the robust increase in the core PPI in July was worrisome and raised the question whether core prices will decelerate with the overall prices in the coming months.