Residential Construction

The headline from today's report on new residential construction was the 12 percent drop in housing starts from February to March. The month-to-month change was magnified by a swing in the volatile multifamily data, but the basic message of gloom was not misleading. Single family starts, at an annual rate of 680,000 in March, were the lowest since January 1991. Permit data, builder surveys, and market conditions indicate that this still isn't the bottom. The cyclical peak for single family starts was an annual rate of 1.84 million in January 2006.

Even though the contraction in residential construction has extended to virtually all areas and market segments, there are some differences revealed by the data. Multifamily starts, for example, haven't fallen by much over the past couple of years, despite the 25 percent decline in March from a random uptick in February. For the first quarter of 2008, multifamily starts averaged 313,000 at an annual rate, exceeding the annual total for 2007 and not much below the annual total of 352,500 in 2005. This partly shows a failure of condo construction to adequately respond to the severely-glutted condo supply, but largely reflects increased construction of, and relatively-healthy demand for, rental apartments.

Among the four Census Bureau regions, the Northeast has experienced the least severe single-family decline, with new home sales down by 20 percent from 2005 to 2007, compared to 40 percent nationally. But with the Northeast accounting for only about 8 percent of new home sales, that doesn't provide much support for the national economy. The steepest regional declines have been in the Midwest and West, where new home sales and single family starts fell by nearly half from 2005 to 2007 and have fallen further in the early months of 2008.

As is typical during housing downturns, construction of single-family homes on customers' land has been more resilient than "for sale" construction on builder-owned land. About 20 percent of single-family starts occurred on customer-owned land in 2005, but that share was up to 32 percent by the 4th quarter of 2007.

The inventory of new homes for sale has declined somewhat in recent months, down to 471,000 at the end of February 2008, compared to 544,000 a year earlier. That still represents 9.5 months supply at the latest sales rate. Moreover, although there were fewer homes for sale in the construction pipeline, the number of completed unsold homes was up from February 2007. Among those completed homes for sale, the median time since completion was 7.2 months, compared to an already-high 4.2 months a year earlier. And that doesn't include homes with sales contracts that had been cancelled.

For aspiring first-time homebuyers, perhaps all this represents possible bargains, although home prices are still much higher than they were five years ago. For existing home owners, the housing and financial industries, and the national economy, the data paint a pretty grim picture. Current production is below the rate needed to accommodate longer-term demand, and eventually that will eliminate the excess supply. The process will take a while, however, especially with a recession likely to constrain new household formations, and with foreclosures dumping more supply on the market.

April 16, 2008 -

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