| New Home Construction Continues to Decline As It Should |
| Written by Jonathan Smoke | |
| 10.20.2008 | |
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Discuss this article on the forums. (0 posts) The Commerce Department reported the initial reading of September housing permits and starts last Friday. The numbers were a reflection of the depressed demand environment. While indeed permits and starts were at multi-year lows, the limited production levels are where the market needs them to be until demand returns to normal. The Commerce Department report showed that total housing permits in September were at a seasonally adjusted annual rate of 786,000, which is 8.3% below the revised August rate of 857,000 and is 38.4% below the revised September 2007 rate of 1,277,000. Single-family permits in September were at a rate of 532,000 units, which was 3.8% below the August figure of 553,000. The declines in permits were all statistically significant. Total housing starts in September were at a seasonally adjusted annual rate of 817,000 units, which was 6.3% below the revised August estimate of 872,000, and was 31.1% below the revised September 2007 rate of 1,185,000. The monthly decline was not statistically significant but the annual decline was. Single-family housing starts in September were at a rate of 544,000, which was 12% below the August figure of 618,000. That rate was statistically significant. While we haven’t quite reached the seasonally adjusted lows in single-family permits and starts reached in October 1981, the starts are quite close. We blew right through the last recession-induced downturn levels seen in 1990-1991. Put another way, housing starts haven’t been lower on a seasonally adjusted basis since Reagan’s first year in office and “Video Killed the Radio Star” debuted on MTV. On a non-seasonally adjusted basis, monthly single-family permits and starts were worse in January 1991. So production levels could fall further if consumer sentiment does not improve. Thus far the construction industry has responded accordingly to the market decline. I expect that when new home sales figures are released for September later this month, we will see that the supply conditions will not have improved. But at least since production has declined significantly, the supply conditions are not likely to deteriorate more. When confidence is restored and new home sales pick up to a moderate pace based on long-term (not boom time) standards, the question will be how long will it take for new home construction to pick up. We clearly have problems in construction and business lending that may persist longer than the depressed demand. It will be quite ironic if we face a scenario in the not too distant future in which there are bountiful vacant developed lots and undeveloped new home communities but limited supply of new homes because of an inability to finance the construction. Those with cash and access to capital are likely to gain profitable market share in the next upswing. 
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