The Dark Side Of The Spike In Housing Starts

The unexpected spike in the annual pace of new home starts, boosted confidence in the housing market. But what if the housing market is not ready for more new homes? Constantine von Hoffman from Blown Mortgage discusses why developers should not be adding new inventory right now.

Last week the Commerce Department announced an unexpected 3.6% increase in housing starts in June. The 582,000 units started last month is a solid gain from May’s 562,000 and much more than the 532,000 analysts had been expecting.The increases were concentrated in single-family homes which were up 14% — the biggest rise since December 2004. Housing permits were also up; the 8.75% increase was the largest gain in a year.

This would seem to be good news. A sign that more people are buying or commissioning homes and that developers expect this trend to continue. However, developers have guessed very wrong in the very recent past. (See Florida, Phoenix, Las Vegas and the Case/Schiller index for examples.)

Many economic indicators suggest developers haven’t suddenly become a lot better in predicting the economy:

• The nation currently has more housing stock than it needs. That is why the price of existing houses is going down. More stock continues to be placed on the market at lower prices each month by investors desperate to get anything back on their investments.

• While the increase in the number of people claiming unemployment benefits nationally has slowed slightly (up only .1% in June) it is difficult to see that as a reason to build more homes.

• Mortgage delinquencies have continued to increase. The most recent FHA numbers showed approximately 71,700 more loans became 60 days or more delinquent in April. Loans 60-plus-days delinquent increased approximately 7% that month to 1.2 million.

• Commercial real estate prices dropped 7.6% in May. So it hardly seems that businesses are about to expand or staff back up.

• Companies that sell to the construction trade are not optimistic about the coming year. Caterpillar announced dealer inventories had been cut $1.5 billion in the first half of 2009 and the company expects that to continue. The reasons: “Factors depressing construction included high inventories of unsold homes, lower selling prices and continued stringent standards for mortgage qualification.”

So why the increase? As with so much economic activity these days the cause seems to be wishful thinking. Developers think first time home buyers are going to flood the market before the Dec. 1 end to a federal program offering first-timers an $8,000 tax credit.

While there are undoubtedly a number of wise families who have kept their financial powder dry and will be able to take advantage of the federal aid, why would they buy a house that has either just been completed or is about to be? They are understandably going to want to get the most for their money. Why would they choose brand new construction over very recently brand new – for less money?

Housing starts are frequently referred to as a leading economic indicator. Perhaps we should change that to a leading economic prayer.

This article was republished from Blown Mortgage, a mortgage news and analysis site.