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All Eyes On Housing Starts

All Eyes On Housing Starts

Monday, August 17, 2009
Forbes Magazine
Carl Gutierrez

The U.S. housing market has been on a winning streak of late, as pending home sales soared to their highest level in two years. Investors will learn on Tuesday if the beleaguered industry can keep up the good work when the government announces July housing starts.

Michelle Meyer, a U.S. economist at Barclays Capital, believes 605,000 residential construction projects began in July. She even says that starts have bottomed and the recovery is under way. “Indeed, we expect residential investment to add to third quarter GDP growth for the first time since the fourth quarter of 2005,” Meyer said.

Tuesday’s report has big shoes to fill. Over the past two months, housing starts data have gained 22%. Wall Street analysts, on average, believe there were 598,000 housing starts in July. Meanwhile, the Street expects building permits in July, which will also be released Tuesday, to have totaled 576,000, ahead of the 570,000 recorded in June.

Last month, the Commerce Department made the surprise announcement that starts rose to 582,000 in June. (See “Housing Fits And Starts.”) Wall Street had expected the total to fall to 530,000 in June, from the 562,000 revised recording in May. The rise in June was spurred by a 14.4% increase in single-family home construction, which marked the largest jump since December 2004. The total, which reached 470,000, was also the most since October 2008, though still well off the peak reached in January 2006.

Abiel Reinhart, an economist at JPMorgan Chase, foresees single-family housing starts falling 2.1% July, but expects further gains in the coming months. Reinhart highlighted single-family housing permits as one factor that indicates increases did not continue in July. The volume of permits was 5% below the volume of single-family starts in permit-issuing places in July, he says, a reversal from the prior five months, when permits were always at or above the level of starts. On a whole, Reinhart anticipates housings starts reached 580,000 in July, a measure that’s essentially unchanged from June.

The housing industry may be back from the brink, but it still faces significant macro-economic headwinds, namely high and protracted unemployment, as well as difficult credit conditions. (See “Americans Exhausting Jobless Benefits.” and “Loan Losses Mount.”) On Monday, the Federal Reserve’s most recent Senior Loan Officer Opinion Survey found that U.S. banks continue to tighten lending standards on all major types of loans between April and July. Demand for loans also fell in every major category except prime residential loans for new home purchases. All told, most banks expect lending to remain tight through the middle of 2010, except for mortgage standards, which are already showing some slack.

Tuesday’s reading will follow Monday’s home builder report. The National Association of Homebuilders/Wells Fargo Housing Market Index rose one point to 18 in August. “The index is still at a very low level,” says Reinhart, “but its increase suggests that we will continue to see gains in new home sales.” He notes that present single-family sales index remained unchanged at 16, but the prospective buyer traffic index rose to 16 from 13 and the expected sales index increased to 30 from 26.

The market didn’t take kindly to the news, as the Select SPDR Homebuilders exchange-traded fund fell 4.0%, or 60 cents, to $14.27, Monday. D.R. Horton, meanwhile, slid 4.0%, while Lennar dropped 4.3% and Pulte Homes decreased 1.4%

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