New residential construction ground to a halt in January, as the nation’s homebuilders were hit by weak demand, an oversupply of homes, and a dehabilitating credit crunch, all at once. Housing starts for January plunged another 16.8%, to a seasonally-adjusted annual rate of 466,000, the lowest level on record (records have been kept since 1959). A down number was expected, but not to that degree, as economists were anticipating a decline to 525,000 annualized units. In the last year, housing starts fell by a record 56%, to a 1,064,000 annual rate. For some perspective: In all of 2007, 1.355 million homes were started. In 2006, 1.8 million homes were started.
Building permits, an indicator of future construction, fell by 4.8%, to a record low of 521,000 annualized units. Permits for single-family homes, considered by many analysts as the most important figure in the report, fell 8% to 335,000, also a record low. Building permits are down 50.5% in the past year.
The large declines in the past few months could be good news for the economy, on the principle that when you are in a hole, the first thing to do is to stop digging, said UBS economists Maury Harris and Jim O’Sullivan ahead of the report. “The more starts plunge now, the quicker home inventories are likely to be reduced, potentially limiting the ultimate drop in home prices (the main cause of the financial crisis),” they wrote.
New construction on single-family homes fell by 12.2% for the month, to an annualized rate of 347,000, another record low.
Via FT Advisors:
Home builders may continue to reduce starts a bit in the months ahead, but there is just not that much room left for major declines. Back in 2005, single-family starts peaked at a 1.75 million annual rate, of which 1.4 million were built for sale (as opposed to knockdowns, for example). Now, single-family starts are running at a [398,000] annual rate with only about 280,000 being built for sale. This is not nearly enough to meet the demand for new homes, which is still running at about 400,000 per year. So inventories will continue to fall quickly. In addition, from a long-term perspective, with new home sales eventually returning to an average annual pace of 900,000+ (due to population growth and a taste for new homes), we expect building activity to rebound quickly in 2010 once inventory levels are back to normal.
Construction on buildings with 5 units or more, one of the few positives in the report for the past few months, also fell, by 25%, in a sign that rental properties may not be in demand anymore.
Regionally, total starts plunged 42.9% in the Northeast and 29.3% in the Midwest. Starts in the South and the West, the hotbeds for the housing over-exuberance that has occurred, fell 12.8% and 6.4%, respectively. Starts fell to record lows in three of the four regions in January, while starts in the West dropped to the lowest level in 42 years.
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