Preview: Pace of Housing Starts Decline Expected to Ease

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Although U.S. housing starts and building permits are forecast to reach fresh record lows in January, most economists expect the pace of decline to ease.

Following back-to-back 15% monthly declines in residential construction activity in both November and December, housing starts are expected to fall at a much slower pace of 3% in January.

A consensus estimate is calling for 530k starts of new homes in the month, following 550k in December, which was a record low dating back to 1964. Estimates for the month range from 480k to 578k.

Economists at Desjardins note that housing starts are now 75.8% below their peak of 2.273 million, reached in January 2006, with the decline picking up speed in the past few months.

"However, at this extremely low level, we can assume that the slide will ease," they wrote in a client note, adding that their forecast is for a flat reading of 550k starts. "However, the risks are still clearly to the downside. One sign of this is the 111,000 workers lost in the construction sector in January."

Millan Mulraine, an economics strategist at TD Securities, also expects activity to flatten out in the month. However, he warns that it should not be taken as a sign of a turnaround, but rather a result of base effects.

"In the months ahead, we expect new residential construction to remain soft as the drag from a worsening domestic economy, tighter lending conditions and the massive overhang in the inventory of unsold home, which currently stands at over 12 months, continue to temper new building activity," he wrote.

Economists at Wachovia are a little more downbeat, forecasting a decline to just 500k. "Builders are under intense pressure to work down their inventories and raise cash. Many smaller builders have entered bankruptcy and have ceased all new development activity," they wrote. "We now expect housing starts to bottom out at less than a half million units at an annual rate in the first half of the year."

Meanwhile, building permits are expected to fall to 525k following a reading of 547k in December. Economist estimates range from 480k to 565k.

On Tuesday, the National Association of Home Builders reported that building confidence rose just slightly in February from its all-time record low.

By Stephen Huebl and edited by Sarah Sussman
©CEP News Ltd. 2009