Low Housing Starts Have a Mighty Big Ripple Effect

The Commerce Department released its report on housing starts and building permits in July today, and it isn’t good news.

The report said that construction starts hit their lowest point in a decade in July, and that the year-and-a-half housing recession is nowhere near over. Construction is down 21 percent from July 2006; housing starts dropped even more than expected from June to July.

But that’s not all. Things to note from the report, courtesy of Bloomberg:

  • Construction of single-family homes fell 7.3 percent in July. Multifamily home starts decreased 1.6 percent.
  • Regionally, construction starts fell 11 percent in South, 3.7 percent
    in the West and 1.3 percent in the Northeast. The Midwest was the sole
    exception, rising 2.6 percent.
  • Future construction doesn’t look much sunnier. Building permits fell 2.8 percent — more than anticipated — to their lowest rate since 1996.
  • First-time unemployment insurance applications rose suddenly last week, according to the Labor Department. Initial
    claims rose 6,000 to 322,000 in the week ending Aug. 11, the
    highest in two months. Economists expected them to fall slightly. The unemployment rate is now at a six month high, according to RTT News.
  • Globally, stock markets have fallen due to
    concern subprime mortgage defaults will bankrupt more lenders and
    destabilize the financial system.

It seems unthinkable that things can continue along this downward spiral, and yet, we keep getting news that the housing industry isn’t merely stagnant, but rapidly declining.

So what’s going on?

Many blamed subprime mortgage market issues and tighter reign over credit.

Toll Brothers Inc., the largest U.S. luxury-home builder,
said Aug. 8 that third-quarter revenue dropped 21 percent as the
new credit restrictions reduced the pool of potential buyers, Bloomberg reports.

"Even the most ambitious homebuilders will think twice
about initiating new projects,” Lindsey Piegza, an analyst
at FTN Financial in New York, told Bloomberg. "Falling prices, sluggish demand and dwindling mortgage credit availability will continue to
weigh heavily on residential construction."

Understandably. Bloomberg also noted that buyers are delaying purchases in hopes of further price
declines, and tougher restrictions have shut some borrowers out
of the mortgage market altogether. In addition, the ever-increasing amount of foreclosures will likely return properties to the market — adding to the already large housing supply.

None of which makes developers or builders want to invest time or capital in new construction projects.

"It
does look as if builders are throwing in the towel, especially in the
South which is where the most difficult markets are," said Pierre
Ellis, senior economist at Decision Economics in New York, told CNBC.

And, to add to the stress, with the recent stock market reaction, there’s valid concern that the housing slump is really weighing on U.S. economic interests.

The Fed isn’t ready to cut the interest rate. Fed policy makers conceded after their August 7 meeting that the housing decline (and related issues), or as they called it, "the downside risks to growth," have increased
"somewhat" — but the interest rate has not been changed, holding at 5.25 percent Reuters reported.

In addition, the Fed stressed that "the Committee’s predominant policy concern remains
the risk that inflation will fail to moderate as expected." With inflation as the priority, their position on the housing market appears to be just wait it out.

Yet the housing industry seems anything but calm. As RTT News pointed
out, the lower-than-expected July results are expected to add to
concerns.

"The housing starts number just adds fuel to the fire," Michael Darda, chief economist at MKM
Partners in Greenwich, Connecticut, told CNBC. "You’ve got
financial markets in panic."

And for that panic to subside, the financial market must gain faith in the housing industry again — and  the housing industry, in turn, must regain faith in itself.