Housing Starts Crash, Worst Outlook in Five Decades

December wasn't just a bad month for the U.S. housing market, it was the worst month seen yet in the ongoing recession. Plans for constructing new homes were already at a record low in November, and in December those plans simply crashed.

Over the course of 2008, the annualized pace of new home construction plummeted by 45%, while permits for building new homes took an even steeper dive, falling 50.6%.

"Never in the past 50 years has construction activity been at a lower level," said Dimitry Fleming, analyst at ING. "If housing demand does not stabilise soon, US housing will remain disaster area in 2009."

In December alone, the number of housing starts fell nearly 16% to a pace of 550k -- by far the lowest level in data that dates back five decades. Housing permits -- which gauge performance in the coming months -- fell 11% to a slightly worse reading of 549k.

The data suggest a turnaround is still nowhere in sight, but many economists still managed to find one silver lining in the report.

"With starts getting closer to zero, they can't fall much further," said Paul Ashworth, senior U.S. economist at Capital Economics. "And even if they did, residential construction is now such a small part of overall economic activity, the wider impact of a further decline would be relatively muted," he said.

Similarly, Ian Shepherdson, chief U.S. economist at HFE, said December's sharp drop in activity puts the housing sector close to the bottom. "The rate of decline in Q1 will be nothing like as fast as in Q4," he said.

Even if the market isn't as bad in Q1, home builders still find little reason to be optimistic. The National Association of Home Builders released the builder confidence index for January on Wednesday, which showed sentiment dig further into record low territory. The index now sits at just 8, far below the 50 threshold that indicates optimism in the industry.

Market Reaction:

Repeating a trend seen through the credit crunch, equity futures fell on the soft data, sending the U.S. dollar up as investors sought its safe haven comfort. Five minutes after the release, contracts on the Dow Jones industrial average were down 75 points to 8103 and contracts on the S&P 500 were down seven points to 830.

At the same time, the U.S. dollar was up 0.0157 to 1.2708 against the Canadian dollar, rising from 1.2668 on the data. Part of the loonie's weakness stemmed from a worse-than-expected Canadian retail sales report.

By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2009