Housing Bubble Watch: Building Stats Slip As Does Builder Confidence

The two monthly reports that measure the health of the home construction industry were released this week. The U.S. Census Bureau and U.S. Department of Housing and Urban Development issued its report on housing starts in June and the National Association of Home Builders in conjunction with Wells Fargo published their monthly Housing Market Index (HMI) for July. Taken together the two reports are a good indication that the real estate market is definitely slowing and that builders are not optimistic that things will get better soon.

The Census Bureau report "New Residential Construction in June 2006" covers building permits issued during the month, housing starts, and housing completions. In only the last category was there any improvement over May or over the same month in 2005.

There were 1,862,000 (seasonally adjusted) permits issued for privately owned housing units of all sizes. This is a 4.3 percent decrease from the revised May figure of 1,946,000 and 14.9 percent lower than the June 2005 estimate of 2,188,000. Single family resident permits were issued at an annual rate of 1,395,000, 6.3 percent lower than the May figure of 1,488,000.

Permitting dropped across all regions of the country except in the Northeast which showed a 6.1 percent increase over last month. The increase, however, was apparently attributable to multi-family construction. Single family permits in this region were down 3.9 percent.

At the end of June there were 233,000 outstanding permits for which construction had not commenced This was an increase of 1.6 percent since May. More than half of these currently unused permits (118,400) were located in the South. It would be very interesting to see state-by-state figures for this region.

Builders started construction at an annualized rate of 1,850,000 units in June; a decrease of 5.3 percent since May. Single family starts were down 6.5 percent from May and 11.0 percent from June 2005. The Northeast fell off the previous month's rate by 11.5 percent but single unit construction was down 32.8 percent. The year-over-year decrease in single family starts was 37.8 percent.

Housing completions were up both for the month and year-over-year, but this figure reflects the market months ago. 1,896,000 homes (annualized) were completed in June an increase of 6.4 percent over the revised May estimate and 2 percent more than in June 2005.

And how are builders feeling about all of this? Not so good.

The HMI is derived from a monthly survey in which builders are asked their perceptions for current single-family home sales and their expectations for sales over the next six months as either "good," "fair," or "poor" and asks them to rate current buyer traffic from very low to very high. Any total score over 50 indicates that more builders view conditions as good rather than poor.

In June 2005 the HMI was at a recent high of 72. By May of this year it had slipped to 42 and this month it is down three more points to 39. All three of the survey components slipped but most notable was the decline in the index for sales expectations over the next six months which fell five points to 46. The index gauging current sales was down four points to 43 and the index gauging traffic of prospective buyers dropped from 29 to 27.

Builders in the Western region recorded the biggest dip in confidence, a decline of 9 points to 51. That region had kept a high level of confidence for some time and, even with the recent drop its builders were still more optimistic than those in the Northeast (36), the Midwest (21) and the South (50). The South was actually up two points since June.

The National Association of Home Builders Chief Economist David Seiders said that builders were concerned about the eroding affordability of home ownership and the withdrawal of investors and speculators from the marketplace. But he also said that builders fear more tightening of monetary policy by the Federal Reserve that could drive up interest rates even further.

"In terms of historical comparison, the HMI's movement is essentially in line with readings from the 1994-95 period when the Federal Reserve tightened monetary policy and a fairly orderly cooling-down process occurred in the nation's housing markets," Seiders observed. "That is what our forecasts anticipate happening in the current period, provided the downside risks of rising interest rates and a bail-out by investors/speculators do not become too pronounced.