U.S. Housing Market Bottom Not Yet in Sight, Say Economists

A decline in U.S. housing starts and building permits in May have economists convinced that the end is not yet near for the U.S. housing market turmoil.

"U.S. housing starts have left no doubt that the housing crunch is still in full swing," said Dimitry Fleming at ING Wholesale Banking. "Home builders have now cut production 60% since the peak early 2006, but despite these drastic measures the overhang - as measured by the months of available supply - is still enormous and is even approaching the highs of the early `80s crash."

"For now, all they can do is wait for Federal help and in the meantime cut, cut, cut production," he added.

U.S. housing starts came in below expectations at 975k in May, a month-over-month decline of 3.3%, according to data released from the U.S. Department of Commerce on Tuesday morning. The consensus was looking for a decline to a 980k level. The previous month's 1032k was revised to a level of 1008k.

"Overall the report does support our view that the strong surge in starts reported last month (which has now been revised downwards substantially) was not an indication of an eminent rebound in the U.S. housing sector, and was in fact an anomaly," said Millan Mulraine, economics strategist at TD Securities. "Moreover, fundamentals in the housing sector appear to suggest that a turn-around is not likely to take place until the latter part of this year."

The decline was led by a fall in single family homes - the most important component in the report, accounting for four-fifths of housing starts - which fell 1.0% to 694k, compared to the previous month's 681k level. Multiple family homes contributed 301k, below the previous month's 327k level.

Meanwhile, building permits totalled 969k in May, a decrease of 1.3% month-over-month from 982k last month and above the consensus call for 960k.

Privately-owned housing completions in May were at a seasonally-adjusted annual rate of 1132k.

"Since last summer, residential construction has cut overall growth by an average of one percentage point," wrote Commerzbank Economist Patrick Franke in a note to clients. "By the end of 2008 this effect should be down to almost zero. An important headwind for growth will then be gone. But higher interest rates and higher energy prices present significant headwinds for a solid recovery."

Fixed income markets rallied on the release which came simultaneously with a higher-than-expected PPI figure and deeper-than-expected first quarter current account deficit in the United States. In the minutes following the announcements, the U.S. two-year Treasury note lost three bps to 2.90% while the ten year note lost 4 bps to 2.182%. The USD briefly lost three-tenths of a cent to 1.55 against the euro and two tenths of a cent to 1.019 against the Canadian dollar.

By Erik Kevin Franco and edited by Cristina Markham