Preview: Housing Starts & Permits to Fall Beyond Record Low

The only major economic data to be released for the United States this week is the housing starts and permits report from the Commerce Department. Unfortunately, the news is likely to be grim, suggesting that problems in the housing sector continue to drag down the economy.

With both components already at record lows in November, it would be difficult for the December data to shock the markets with further deterioration. It may be possible, however, for positive data to be interpreted as evidence that the housing market is bottoming out.

Housing starts, which refer to the pace of new homes being built, are expected to drop more than 2% in the final month of 2008, following a huge 19% decline in November, which pushed the annual decline down to 47% - the worst annual decline in the housing market in 18 years.

The annualized pace of housing starts is currently at its lowest level in half a century at 625k, and when the December numbers roll in that figure is expected to fall to 605k.

The large overhang of houses on the market, plus poor home sales amid tight credit conditions and a collapsing job market, are all joining together to keep home builders in a deep hole, said Sal Guatieri, senior economist at BMO Capital Markets.

"Like most other major indicators of economic activity, the housing market is spiralling downwards," he added. "Residential construction will take another big bite out of GDP in the quarter, likely contributing to the sharpest contraction (-5.5% a.r.) since 1982."

Heading into the New Year, construction isn't likely to see a quick turnaround either. Wednesday saw the NAHB homebuilder confidence survey dip from one record low to another in January when it fell one point to 8, far below the 50 threshold that indicates optimism in the industry.

Ian Pollick, economics strategist at TD Securities, said the confidence index suggests that potential home buyers continue to sit on the sidelines "as a result of the deepening recession." Going forward, he said home builders continue to face an uphill battle.

The only point of optimism for the U.S.hHousing market is that mortgage rates continue to fall. According to the mortgage finance firm McLean, 30-year mortgages are averaging in the 4.89% range.

Still, housing permits, which look at plans to construct new homes, therefore gauging housing performance in upcoming months, sits at record lows with an annualized pace of 615k permits. Many will hope to see a turnaround in the December survey, but analysts expect the index to create another record low of 600k in Thursday's release.

By Patrick McGee and edited by Stephen Huebl
©CEP News Ltd. 2009