New home construction shows increase in September; Construction still out pacing sales

This morning the US Census Bureau and US Department of Housing and Urban Development (HUD) issued a their report on New Residential Construction for September 2009 showing an increase in new home construction activity from August.

The report shows the following:

• Building permits issued for single-family residences in September were at an annual rate of 450,000 which is 3.0 percent below the revised August rate of 464,000 and down 14.5 percent from a year ago.
  • The Midwest region, after doing the best last month, had the biggest decline in building permits issued at 8.6 percent below July.  The West saw a decline of 5.2 percent while the South saw a decline of 1.6 percent.  The Northeast was the only region with an increase in permit activity in August being up 4.7 percent for the month.
• Housing starts for single-family residences in September were at an annual rate of 501,000 which is 3.9% above the revised August rate of 482,000 and 8.7 percent below a year ago.
• • The South and Northeast both saw increases in new home starts in September from August up 14.3 percent and 13.0 percent respectively.
  • The Midwest and West both had decreases in new home starts in September from August, down 5.7 percent and 14.4 percent respectively.
• Single-family homes completed in September were at a rate of 464,000 which is 8.3 percent below the revised August rate of 506,000 and 43.1 percent below a year ago.
  • The Northeast region was the only region with an increase in new homes completed in September, up 19.0 percent from August.
  • The Midwest had a decrease in completions of 24.7 percent, the south a decrease of 7.4 percent and the West a decrease of 6.3 percent.

Something to remember is all the numbers above are “seasonally adjusted” annual rates and the year over year comparisons are just comparing the numbers for September 2009 versus September 2008. Another way I like to look at where things stand is to simply look at the year to date data; actual numbers, not seasonally adjusted, compared to last years ytd numbers at this same time. I think this may give a little better comparison so those numbers are below:

• Through September 2009 there have been 331,200 permits issued for new homes compared with 479,300 this time last year for a decline of over 30.8 percent (August YTD numbers were down 33 percent).
• Through September 2009 there have been 339,900 new homes started compared with 518,800 this time last year for a decline of 34.4 percent (August YTD numbers were down 37.4 percent).
• There have been 371,300 new homes completed through August 2009, compared with 617,200 this time last year for a decline of 39.8 percent (August YTD numbers were down 39.5 percent)

We saw some slight increases in new home activity for a month or two but clearly the trend is relatively flat which, in spite of the fact it pains me to see so many people in the construction industry struggling, I think is good from the standpoint of the housing market. The housing market still, in general, has excess inventory and we are going to have literally millions of foreclosures flood the market over the next couple of years which will add to the inventory of homes for sale. Granted, some people (myself included) prefer a new home over an existing home, but as the prices on the existing homes continue to edge down, particularly those on distressed sales, the gap is going to widen between new and existing homes which will convince many buyers to settle on a pre-owned home for now.

The other concern I have is all of the new home data, permits, starts and completions, even though down significantly from last year, are still at a rate that is outpacing new home sales. New home sales for August were at an annual rate of 429,000 homes which, based upon the data above, means even now there is still potentially an oversupply of new homes being built relative to the number of homes selling.

Below are the same comments and concerns I printed last month about the new home construction numbers as I think it all still applies.

The last concern I have has to do with the fact that I believe the new home sales we have seen over the past few months have been stimulated by two things that will leave the market at some point: tax credits and below-cost prices.

The first-time buyer tax credit has definitely contributed to sales, in fact from most agents I speak with they tell me the first time buyer market is practically the only market at this point. While Congress may extend the credit, at some point it will end, and unless we are truly in a recovery by then I think it could negatively impact new home sales.

The second issue, below-cost prices, is potentially a bigger issue. Because of the amount of new home inventory that was out there when the market tanked, and an awareness by banks that they would do better to allow builders to sell the homes at whatever prices the market would bear and release the house in exchange for the proceeds from the sale, there have been many homes sold at a price that is significantly below their construction cost. In fact, my guess is this would be true in over half the sales of new inventory homes. This is something that definitely will not be repeated, at least not intentionally. Going forward these “deals” are going to dry up and this incentive will be gone which I feel is going to throw cold water on new home sales until, again, we see a real recovery.

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