Wednesday, June 16, 2010

Home Construction Starts Drop, Continuing Weakness In Real Estate Market

This isn't the kind of news you want to hear if you're in the real estate business or construction industry.
The Commerce Department said Wednesday that construction of new homes and apartments fell 10 percent from a month earlier to a seasonally adjusted annual rate of 593,000. April's figure was revised downward to 659,000.

The results were driven by a 17 percent decline in the single-family market, which had benefited earlier in the year from federal tax credits of up to $8,000. It was the largest monthly drop in single-family construction since January 1991.

Applications for new building permits, a sign of future activity, also fell. They sank 5.9 percent to an annual rate of 574,000, the lowest level in a year.

The report missed Wall Street expectations by a wide margin. Economists surveyed by Thomson Reuters had predicted that housing construction would only fall to seasonally adjusted annual rate of 650,000 and had forecast that building permit applications would increase to an annual rate of 630,000.
The homeowner credits that expired earlier this year goosed sales temporarily but now that they're done, the market is reverting to the problematic levels before the credit was in place. In fact, it shows that the credit failed to do its job in luring new buyers into the market despite moderating home prices in some areas and the up to $8,000 credit on first time homeowner purchases.

The real issue is that the prices still need to come down further in many market areas, and that's despite many homeowners being underwater. There is a glut in some markets of existing homes, which drives down demand of new homes. That is why the demand for new permits has dropped off and it wont recover until people start to feel more comfortable with their personal economic situations and they feel that the local economy is improving.

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