HOUSING MARKET TRENDS

Nov 20, 2006

U.S. housing starts in October dropped 14.6% to a seasonally adjusted 1.486 million annual rate, the lowest level in six years. Building permits, an indicator of future home-building activity, fell a ninth consecutive time. Nonetheless, builder sentiment ticked higher for a second straight month in the survey portion of the report. What does it all mean for the housing market? for the economy? Here is a selection of economists' reactions.

* * *

Significantly weaker than expected report ... A plunge in the key single-family category led the drop. ... Single-family starts have probably now fallen enough that significant progress should start to be made in clearing elevated inventories, while multifamily starts should be a relative pocket of strength going forward given much the stronger fundamental backdrop in the apartment market. -- David Greenlaw and Ted Wieseman, Morgan Stanley Research

* * *

The surprisingly low volume of starts is large enough to affect the gross domestic product growth forecasts for the fourth quarter and beyond. For instance, a quick calculation -- that pegs the fourth-quarter average of starts at the October level and permits -- cuts fourth-quarter growth by 0.5% and first-quarter 2007 growth by 1%. -- David Resler, Nomura Economics Research

* * *

Slowing sales of new homes and burgeoning inventories of unsold new homes have convinced homebuilders to sharply reduce their production of new homes. Although this will generate more weakness in the near term, the quicker the housing correction is completed, the sooner economic growth will rebound. These data will not unnerve the FOMC because, so far, there is still little evidence that the weakness in housing has spilled over to affect consumer spending. -- Steven A. Wood, Insight Economics

* * *

The decline in housing starts in October was from a significantly higher-than-expected level in the previous month. Also, housing starts have now fallen well below the level that is necessary to lower the supply of unsold homes at current selling rates. In addition, housing starts are now below the level of building permits which is a modest positive for stabilization in construction activity (combined with the unseasonably warm weather in November, this points to a rebound in housing starts this month). -- John Ryding, Bear Stearns

* * *

Since January, housing starts are down 34% and permits have fallen by 30%. Pretty dismal numbers, right? Actually, we see this as an unambiguously good thing. The faster builders address their bloated inventories and bring the pace of home construction down, the quicker the housing correction will play out and the economy can return to a more normal footing. -- Stephen Stanley, RBS Greenwich Capital

* * *

The homebuilder survey ... is often misleading when it falls, as builders are generally more pessimistic in the survey than they are in building. Yet we also think that the declines in the survey are too large to ignore, and therefore that it is indeed telling us something about the state of housing, and not just about the state of mind of homebuilders. We think that the survey is therefore accurately reflecting builder intentions to slow housing (albeit probably not to the precise degree suggested by the survey index), and we have consequently been looking for a trend decline in starts this year and next. -- Joshua Shapiro, MFR Inc.