New Housing Construction Starts Remain Stagnant

A recent report on residential construction suggests that home builders won't be sparking a broad based recovery in the economy in the near future. I read a recent report which showed new US housing starts for July at a 546,000 annual rate. While a small improvement over June, the number is significantly lower than economists' projections. The number of July housing starts was also down 7 percent from July 2009

Even though housing starts showed a small monthly increase, economists suggest further analysis of the data outlays weakness in the market. Mainly, a huge portion of the increase was due to a 33 percent increase in starts in the multifamily housing sector, which tend to be a very volatile sector of the overall market and represent a much smaller portion than single-family units. Single-family housing starts declined by 4 percent in July, the third consecutive monthly decline for starts in the sector. Also, requests for permits for single-family housing starts, a key indicator of future activity, dropped 1 percent from June to July. It was the fourth consecutive monthly drop for single-family permits, which are currently at their lowest level since last April.

Another report last week showed builder confidence at its lowest level since March 2009. The spring brought in a flood of new home construction in response to buyers rushing to qualify for federal homebuyer tax credits. But since the closing deadline for the tax credits, both sales and housing starts have begun to drop. Some analysts are predicting a rise in home building activity once the after-effects of the tax credit program wear out, comparing the housing situation to the government's car program. Car sales sky-rocketed last summer, then plummeted for a couple months before returning to a normal pace. Analysts say the housing sector will experience similar effects, though at a somewhat slower pace.

The key to a strong housing construction recovery will be the job market. With the creation of new jobs comes the need for new houses for workers. Also, job growth typically increase household formation rate, which reduces inventory, thus creating a need for new construction. Of course, as long as demand remains weak, the home building industry will not be a significant part in the economic recovery. The flood of distressed properties hitting the market for the last two years have stifled construction activity. Until the foreclosures slow down and the supply dwindles to more reasonable numbers, builders will be unwilling to ramp up activity.