Housing Bubble Watch: Housing Permits, Starts, Builder Confidence Fall

It's that time again. The National Association of Home Builders (NAHB) and the Census Department have released their monthly reports on the state of the new home industry in consumer terms and the attitude of those who make their living by building the homes.

The Census Bureau (U.S. Department of Commerce) and the U.S. Department of Housing and Urban Development issue a joint report on housing permits, starts, and house completions each month and, except for a few anomalies that have gotten economists all excited, these figures have been generally declining for most of the year.

July was not much of an exception.

Building permits issued in July were at a seasonally adjusted annual rate of 1,747,000 units, a 6.5 percent decline from the revised June rate of 1,869,000 and nearly 21 percent below the annualized rate of permits issued in July 2005 (2,206,000). Permits for single family housing (1,318,000, annualized) declined by 6.1 percent below the number issued the previous month.

Housing starts declined to 1,795,000, a 2.5 percent change from revised June figures and 13.3 percent lower than the July 2005 rate of 2,070,000. Single-family starts totaled 1,452,000, off 2.3 percent from revised June figures.

1,927,000 privately-owned housing units (on an annualized basis) were completed in July. This was a decline, overall, of 5.4 percent from June but, in about the only piece of good news, was actually an increase of 2.3 percent over the same month in 2005. This, however, may be an indication of the lag time involved in construction of multi-unit dwellings. Single family homes were completed at a rate of 1,665,000, a decline of 4.6 percent from June.

Figures for permits were down in every region, going into double digits in the West where permits for single family units were off by nearly 15 percent. Year over year every region dropped by at least 17 percent (the South) and by a full one-third in the West.

Interestingly, the number of units for which permits had been issued but construction not yet begun actually dropped in July. 214,400 permits that had been previously pulled were still sitting on builders' desks at the end of the month - this was 9.6 percent fewer than in June.

So how are builders feeling about the future? Not so good according to the Wells Fargo/NAHB Home Builders Housing Market Index (HMI) for August. The index just hit its lowest level since February of 1991, the seventh consecutive month in which the index has fallen.

The HMI measures builder perceptions of current sales and their expectations of sales over the next six months on a scale of poor, fair, or good and then asks respondents to rate sales traffic from very low to very high. Scores for each component are then used to calculate a seasonally adjusted index. Any number over fifty - by component or aggregated - indicates that more builders view sales conditions as good rather than poor.

The single-family home sales component fell seven points to 36 while sales expectations and perceptions of sales traffic each fell six points to 40 and 21 respectively.

Builders in the Midwest may need to seek professional help. The total HMI index in that region fell to 15, five points lower than July. The South and West are catching up with a nine point drop to 41 in Dixie and a 10 point decline to 42 in the West.

NAHB Chief Economist David Seiders commented that "It's important to recognize that home sales and housing production are subsiding from record levels a year ago, and those levels clearly were unsustainable. We expect the erosion in market activity to continue through most of this year before stabilizing in 2007." He also noted that builder sentiment tends to contract "by a greater margin than actual sales and production activity."