Housing construction plunged in October, as builders slashed activity to the lowest level in more than six years.
Further declines were expected as the five-year housing boom turns into what is being described as a “housing recession.”
Construction of new single-family homes and apartments dropped 14.6 percent to an annual rate of 1.486 million units, the slowest pace since July 2000.
The news was even more stark for building permits, which fell for a record ninth consecutive month, dropping 6.3 percent to an annual rate of 1.535 million units, the slowest pace in nine years.
“A tornado hit the housing sector in October,” said Joel Naroff, chief economist at Naroff Economic Advisors, a private forecasting firm. “Builders have seen the light from the housing market meltdown and are now moving as rapidly as possible to reduce supply.”
Housing, which had been one of the economy’s standout performers during a five-year boom, shaved about a percentage point off growth in the July-September quarter. That pushed overall economic activity as measured by the gross domestic product down to an anemic rate of just 1.6 percent, the slowest growth in more than three years.
Many economists predicted that GDP growth would be trimmed by a similar amount in the current quarter as housing continues to act as a drag, through lower sales and reduced building activity. Construction in October stood 27.4 percent below the level of activity a year ago, the biggest year-over-year decline in more than 15 years.
“The scale of the yearly decline is now in housing recession territory,” said Brian Bethune, chief economist at Global Insight, a Lexington, Mass., forecasting firm.
With inventories of unsold new and existing homes near record levels, many analysts said the slump in housing was likely to last for a number of more months, possibly until the middle of next year.
But some economists noted some faint hints of a turnaround. A monthly survey of builder sentiment conducted by the National Association of Home Builders was up in November for the second straight month, the first back-to-back gains since mid-2005.
The hope is that recent declines in mortgage rates, which have been spurred by the decision by the Federal Reserve to put its rate hikes on hold, should entice buyers back into the market.
David Seiders, chief economist for the builders’ group, said he still believed what was occurring was a correction in the housing market with builders moving aggressively to cut back on production and move finished homes by offering a raft of incentives.
Analysts said the fallout from the housing weakness should not be enough to push the country into an outright recession unless home prices drop sharply on a nationwide basis, triggering a cutback on consumer spending because homeowners suddenly feel less wealthy.
Concerns on that score were raised when it was reported last month that the median price of a new home dropped in September by the largest amount in 35 years, when compared to prices a year ago, and prices of existing homes were down by an all-time record.
Analysts believe that home prices will continue to weaken in coming months until the backlog of unsold homes is reduced further. But they said the declines should not cause a significant cutback in consumer spending, given that other factors currently are supporting spending including low unemployment and falling gasoline prices.
Consumer confidence rose to a two-month high in early November, reflecting solid job prospects and lower energy prices, according to the RBC Cash Index released Friday by Ipsos, an international polling firm.
Construction of single-family homes fell by 15.9 percent in October from the seasonally adjusted September level, dropping to an annual rate of 1.177 million units. Construction of multifamily units dropped by 9.1 percent to an annual rate of 309,000 units.
The drop in construction was led by a 26.4 percent decline in the South. Construction fell by 11.7 percent in the Midwest and was down 2.1 percent in the West.
The only region showing strength was the Northeast, where construction jumped by 31 percent.