Housing Bubble Watch: New Home Construction Reports

Two monthly housing market indicators have been released so far this week, both relating broadly to home construction and showing a continued slowing of the housing sector and a related loss of builder confidence.

The U.S. Census Bureau and the U.S. Department of Housing and Urban Development have published their joint report on new residential construction for August 2006. The survey covers the number of building permits, housing starts, and housing completions throughout the country and it reported a further retreat in each category from the previous month and double digit drops in two of the three categories since the same month in 2005.

Building permits for privately-owned housing units were issued at a seasonally adjusted annual rate of 1,722,000 in August. This is a 2.3 percent decline from the revised rate in July of 1,763,000 and is 21.9 percent lower than the estimated rate of 2,205,000 permits in August, 2005.

Permits for single-family houses totaled 1,279,000 (annualized). The revised figure for July was 1,325,000 representing a change of -3.5 percent.

The drop in permits since last year was greatest in the West where single-family authorizations were down 31.2 percent compared to August 2005. All regions, however, were down at least 20%.

Housing starts dropped 6.0 percent from July to August. The revised annualized figure for the previous month was 1,445,000 privately-owned housing starts which dropped to an estimated 1,665,000 in August. This month's figure is 19.8 percent below the August, 2005 estimate of 2,075,000.

Single-family houses were started at an annual rate of 1,360,000 units, 5.9 percent below the revised July number of 1,445,000.

The West again showed the most damage year-over-year with single-family starts down 33.4 percent. The South, however, was down only 9.9 percent compared to August 2005.

Housing was completed during the month at a seasonally adjusted rate of 1,868,000 units, a drop of 3.2 percent from the revised July estimate of 1,929,000 and 4.4 percent below the same month in 2005 when 1,954,000 units were completed.

The reports authors note that care should be taken in interpreting the results of this release as month-to-month changes can be irregular and not indicative of a trend. They caution that it can take four months to establish a trend for permits, 5 months for housing starts, and 6 months for unit completions.

The National Association of Home Builders and Wells Fargo just published the Housing Market Index (HMI) for September. This survey measures builders' confidence in and attitudes toward the housing industry. For the eighth straight month the HMI dropped, this time from 33 to 30, putting it at its lowest level since February 1991. The index has dropped 27 points since the first of the year.

So the chicken and egg question. Are builders' attitudes driving their behavior, making them pull back from requesting new permits (and perhaps at an earlier stage of planning, not acquiring land or performing engineering, etc.) or acting on permits they may already have in hand or are reports on permits and housing starts and sales surveys negatively impacting their attitudes?

In any case, the Wells Fargo/NAHB survey measures builders' perceptions about current single family sales and expectations for sales over the next six months on a scale of good, fair, or poor and asks respondents to rate current buyer traffic on a three point scale from very low to very high; responses in these categories are then used to derive the overall HMI.

Builders' measurement of current sales was down five points to 32 and expectations for sales over the next six months dropped four points to 37. Assessments of buyer traffic were unchanged at 22. Any score in a given category or for the index overall under 50 is considered to indicate negative perceptions and expectations.

NAHB Chief Economist David Seiders commented that "builders are adopting an increasingly cautious attitude in their near-term outlook for new-home sales. They're experiencing falling sales, rising sales cancellations, and increasing inventories of unsold units. And although many builders are offering substantial incentives to bolster sales and limit cancellations, many potential buyers are now waiting on the sidelines to see how the market shakes out before proceeding with a home purchase."

"...long term housing fundamentals will be very favorable. In fact, the housing market that emerges from this correction will have better balance between supply and demand and will be able to ride on excellent underlying fundamentals for years to come."