New home construction shows slight decrease in August; 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 August 2009 showing a slight decrease in new home construction activity from July.

The report shows the following:

• Building permits issued for single-family residences in August were at an annual rate of 462,000 which is 0.2 percent below the revised July rate of 463,000 and 15.7 percent below a year ago.
  • The Midwest region did the best this month with a 3.9 percent increase in building permits from July. The Northeast region permits stayed at the same annual rate as July and South and West both saw decreased single family permit activity in August, down 0.8 percent and down 2.1 percent respectively.
• Housing starts for single-family residences in August were at an annual rate of 479,000 which is 3.0% below the revised July rate of 494,000 and 21.7 percent below a year ago.
  • The Midwest was the only region that saw an increase in single-family housing starts in August from July with an increase of 7.1 percent for the month. The Northeast region saw a 14.5 percent decrease, the South a 4.9 percent decrease and the West a decrease of 0.9 percent.
• Single-family homes completed in August were at a rate of 489,000 which is 1.6 percent below the revised July rate of 497,000 and 31.6 percent below a year ago.
  • The four regions in the US were all over the charts on this statistic for August. The Northeast had a 41.9 percent decrease in completed homes for the month, the West a 5.9 percent decrease but the South had a 4.2 percent increase in completions and the Midwest saw a 19.2 percent increase in completions for the month.

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 August 2009 versus August 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 August 2009 there have been 291,400 permits issued for new homes compared with 435,100 this time last year for a decline of over 33 percent (July YTD numbers were down 35 percent).
• Through August 2009 there have been 294,200 new homes started compared with 470,100 this time last year for a decline of 37.4 percent (July YTD numbers were down 39.8 percent).
• There have been 327,800 new homes completed through August 2009, compared with 541,900 this time last year for a decline of 39.5 percent (July YTD numbers were down 40.5 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 July was at an annual rate of 433,000 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.

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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