Only long thaw will help icy new-home starts
Home builders are suffering
from a frozen construction market, and forecasters
say conditions aren't likely to start warming
any time soon.
A combination of overproduction and a retreat by real
estate investors ushered in the cold snap, and
economists say it is going to take time and
discipline for the new-home market to thaw itself
By the end of 2006, builders
were beginning work on a seasonably adjusted
18 percent fewer homes than the year before.
A glut of existing homes is largely driving
"We grossly overproduced
the market, and we have to clear that out,"
says Dave Seiders, chief economist for the National
Association of Home Builders.
One way economists measure the
housing market is by calculating how many months
it would take to sell all the homes listed for
sale at the current buying rate.
According to Mickey Levy, chief
economist for Bank of America, the inventory
of unsold new houses nationwide fell from a
high of 7.2 months' worth of homes sitting on
the market in mid-2006 to 5.9 months in January.
While that's an improvement, Levy says he would
prefer to see that number in the range of 4.5
Beginning in July 2006, the level
of new-home sales appeared to end its freefall
and flatten out, Levy says. But while the sales
figures stopped hemorrhaging, they also didn't
post numbers that might encourage contractors
to build more homes.
To worsen the situation, part of what stopped the bleeding was that builders began discounting their existing housing stock to help sales along.
The good news is that as buying continues, even at its anemic pace, it will eat away at the existing inventory. But until that number falls to a point that demand picks back up, construction crews across the country sit idle.
"And you can expect home building to remain subdued until inventory is whittled down further," Levy says.
To see where the cold front came
from, Seiders says you need to look back in
time. During 2004, 2005, and, in some cases,
2006, many housing markets nationwide were in
an unsustainable boom, he says.
"Builders were recording growth and sales that the markets could not sustain," he says. "In many areas, that was driven by an unusual amount of investors and speculators pouring into some markets."
interest rates and accommodative lending
also combined to stoke the flames, Seiders says.
"Coming to the end of last year, we knew we were in for a correction in housing starts. We certainly got it," he says.