As the housing market remains weak in many parts of the country, home builders are looking for a light at the end of the tunnel. The latest statistics on housing starts gave them only the faintest glimmer of hope. While there are some pockets of strength, it’s too soon to know when the industry will hit bottom, homebuilders and economists say.
Amid sluggish sales and rising problems with mortgage defaults, construction of new homes and apartments fell 2.1 percent in May, the worst performance since a nearly 14 percent plunge in January according to the latest data from the Commerce Department. Though the numbers included a slight up tick in building permits, the huge overhang of unsold properties continues to create a strong headwind for builders of new homes.
“I still think we're not at the bottom in terms of housing construction,” said Mark Vitner, a senior economist at Wachovia Corp. “Sales have to bottom out first. ... We haven't seen that yet. And then construction starts will probably bottom out six to nine months after that."
Hardest hit have been regions that were enjoying the most rapid growth during the height of the housing boom, including California, Florida, Arizona and Nevada. Homebuilding showed signs of strength some Northeast and Midwest market. But homebuilders like Robert Toll, CEO of Toll Brothers, say it’s too soon to say whether the industry has hit bottom.
“I would say we have not got the bad times behind us,” he told Wall Street analysts late last month. “Though it could be. You never know.”
A survey of builders earlier this week found that their outlook in June fell to the lowest level in 16 years, during the sharp housing downturn in 1991, according to the National Association of Home Builders. The housing market index tracks builders’ perceptions of current market conditions and expectations for home sales over the next six months.
To add to the uncertainty, mortgage foreclosures are still rising, which adds more unsold inventory onto an already weakened market. A jump in mortgage rates within the past few weeks has thrown even more cold water on demand.
“It is clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market and interest rates on prime-quality home mortgages have moved up considerably during the past month,” said David Seiders, chief economist with the home builders.
Building permits, which can be an indication of future building, rose 3 percent from April, but remain 22 percent lower than a year ago. Nationwide, the drop in May starts followed small gains in April and March. Single family homes fared worse than multi-family units. And not all segments of the market are contracting, even in hard hit areas like Florida.
“What we’re seeing is a relatively quickly growing demand for rental housing and housing for sale at the lower end of the market where people can live and have a family,” said John Wiseman, president of Core Construction in Sarasota, Fla.
That trend showed up in the government data for May; single-family home construction was down 3.4 percent last month while construction of apartments rose by 3.1 percent.
Construction is also down sharply from the peak building frenzy because lenders have tightened up on easy credit terms and speculative buying. Wiseman said lenders and investors are looking for projects that are “pre-sold” before they give the green light.
“For a condominium building, unless you’ve got at least half the units sold they’re not going to go forward with it,” he said. “You have to first eat up all the (existing home) inventory and then you start selling the newer products.”
Nationwide, that inventory stands at about six months supply for new homes and more than eight months worth of existing homes.
Bad loans, especially among the riskiest — so-called ‘”subprime” — are also putting the brakes on new construction. On Friday, rating agency Moody’s downgraded some bond issues backed by subprime loans. So far this year, downgrades make up less than 2 percent of all mortgage-backed securities. But rising default rates could increase the risks to investors in those bonds, especially those backed by the newest loans.
“The biggest problems that we're seeing with subprime mortgages are mortgages that were made after the market had peaked,” said John Langston, an analyst at First Dallas Securities. “What I really think was happening there is that you had a lot of speculators that were scrambling trying to lock in financing because they were having to close on homes that they never intended to close on.”
It’s unclear how long it will take for the home building industry to recover. But industry watchers say much depends on the outlook for the overall economy which, so far, has been able to shrug off the housing downturn.
“The economy is picking back up,” said Vitner. “If you took housing out of the economy, we're growing at about a 3.5 percent annual rate. The reason why that's important is that that growth is what's driving home sales. .. We're seeing the job and income growth are picking back up. So (home) sales should bottom out in the not too distant future.”