Single-Family Home Building Declines

Spending on private residential construction dropped 2.5% in November, its biggest decline in 5 years. This was the 21^st consecutive drop in home construction, which illustrates a slowing trend for private home building. Non-residential building, however, showed an increase of 2.1%, which offset the drop in residential construction. Total construction spending increased by 0.1% in November. Meanwhile, the Institute of Supply Management’s manufacturing index dropped from 50.8 to 47.7. Any number below 50 indicates contraction in manufacturing. Stalling home building and manufacturing will most likely lead to slower economic growth and affect the overall GDP. These results are closely related to the higher cost of credit and the problems in the housing sector, both of which result in lower consumer spending. What we get next is either (or maybe even both) of the following: another rate cut or recession.

Building Permits, Construction Drops

A report by the Commerce Department says that construction of new homes dropped 5.5% in November to the lowest level in 16 years. Applications for building permits fell 1.5% to the lowest level since 1993. Meanwhile, construction of multi-family homes increased 4.4%. The builder sentiment index remained at 19 in December for a third straight month, the lowest reading in more than two decades. And now the question is, can it really get any worse? Naturally, builders are worried: after all the Real Estate speculation, those who got burned no longer have the finances or credit rating to buy a new home. As an interesting aside, a survey by Countrywide Bank showed that getting financially fit is the top New Year’s resolution this year. Physical fitness comes second - households consider sound finances more important than healthy bodies.

Lennar Waiting For Better Times

According to an article in the RealEstateJournal, Lennar Corp. has decided not to sell new homes that are currently under construction. They realize that, should they decide to sell, they will be selling at a loss, and are unwilling “to go below a certain floor”, said Chief Executive Stuart Miller. Hovnanian Enterprises Inc. and Standard Pacific Corp. are still trying to sell, offering discounts and other incentives.

While it is easy to understand the builders’ anxiety over price cuts, I keep wondering whether this will work. Perhaps if they keep cutting prices on homes that are still for sale they could get the inventories moving, but having completed homes sitting vacant means constant expenses. True, they can’t just leave the homes unfinished, but completing them and then waiting for the market to improve doesn’t sound like the best idea ever to me. Luxury builder Toll Brothers is doing something quite different: it refuses to cut prices, even though this may mean few, if any, sales. Something like the “best of both worlds”, - fine, if they can afford it.

Builders: focusing on affordability

As the housing slump keeps getting more severe, builders are looking for new ways to attract clients. Price discounts and free upgrades didn’t do much to reduce inventories, so now builders are concentrating on more affordable, smaller housing units.

During the housing boom, the average size of a home increased – along with its price – as many buyers attempted to purchase as much house as possible. In recent years many have come to realize that the house they live in doesn’t have to be a huge and expensive one to provide comfort and a sense of homeliness. While demand for housing grew, builders would construct larger houses and sell them at higher prices, but now that affordability has really become an issue, 1,000 – 1,600 sq. feet homes are back in fashion.

KB Home, one of the largest home builders which suffered a second-quarter loss of $148.7 million, is trying to revive the market by offering a line of smaller homes. D.R. Horton is also downsizing, providing more affordable options for buyers. Builders are generally better motivated to unload homes than other sellers on the market, because unsold homes incur significant losses as they stay unoccupied.

Well, apparently it takes a housing slump as severe as the current one to make buyers, builders, agents, lenders and investors apply some common sense when making financial decisions. Better late than never, after all.

Construction declined in May

New construction dropped 2.1% in May from a month earlier, and was 24.2% lower than last year. Permits were up 3%, but that came after a 7.1% drop in April, so the rebound is not that significant

David Seiders, chief economist for the National Association of Home Builders, predicted that new construction will decline by 22% this year. “Improvements in housing starts”, he said, will come no earlier than next year.

Housing starts dipped 3.4%, and were 26% lower than in May 2006. All regions reported year-over-year declines, but monthly data varied. In the Northeast, starts increased by 0.9% month-over month, but were down 20.6% compared to May 2006. In the West, starts were down 12.1% from April and 33.3% from a year earlier. In the Midwest, starts increased by 9.1% month-over-month, but were nevertheless down 23.2% year-over-year. In the South, single family starts declined 3.4% on a monthly basis and 24.2% from May 2006.

All this comes to say that monthly fluctuations of 1-2%, whether up of down, do not change the bigger picture. Currently demand for housing is exceptionally low, due to a number of reasons, and naturally this is dragging construction down. As long as inventories – and home prices – remain high, construction will not show any improvement.

David Seiders: Home construction may take until 2011 to recover

David Seiders, chief economist for the National Association of Home Builders (NAHB), said the current bust in home construction may last until 2011. Until then, construction will probably stay below last year’s levels.

Latest economic data on home prices and home construction has been more than gloomy, suggesting that the housing “slump” is far from over. Construction starts were 1.53 million in April according to the Commerce Department, compared to 2.29 million in January 2006. According to Seiders, “We’ve fallen way below trend”, because activity was especially strong during boom times. Unsold inventory is at the highest levels since 1999 when the National Association of Realtors started keeping track of it.

New-home sales increased in April, driven up by sharp declines in home prices. In addition to offering various incentives to home buyers, developers are now slashing prices by 10-20 percent and even more. The median price of a new home fell 11 percent year-over-year in April, to $229,100. Sales of previously owned homes fell to the lowest level in nearly four years, bad news for anyone hoping to sell their home at a reasonable price.

Bad time for home builders so far, but with inventory this high, it seems that things are going to get even worse. Staying in the business and avoiding losses is hard enough already, and making any profit in 2007 seems out of the question.