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May, 17th 2011

Not building (many) more new homes

– Liz Mair

Interesting new numbers as reported by Reuters:

U.S. housing starts and permits for future home construction fell in April as an overhang of homes on the market discourages builders from taking on new projects, pointing to prolonged weakness in the housing sector.

The Commerce Department said on Tuesday housing starts dropped 10.6 percent to a seasonally adjusted annual rate of 523,000 units. March's starts were revised up to a 585,000-unit pace from the previously reported rate of 549,000 units.

Economists polled by Reuters had forecast housing starts rising to a 568,000-unit rate. Compared to April last year, residential construction was down 23.9 percent, the largest decline since October 2009.

Residential construction is being crowded out by an oversupply of used homes on the market, in particular, foreclosed properties, which sell well below their value.

Home builders' sentiment was flat in May, the National Association of Home Builders said on Monday.

Though builders expected a modest improvement in sales during spring, they anticipated market conditions to weaken in the next six months.

Groundbreaking last month was depressed by a 24.1 percent tumble in volatile multi-family homes, where starts for buildings with five or more units dropped 28.3 percent. Single-family home construction fell 5.1 percent.

New building permits dropped 4.0 percent to a 551,000-unit pace last month. March's permits were revised down to a 574,000-unit pace and economists had expected overall building permits in April to remain unchanged at the previously reported 585,000-unit pace.

Permits were held down last month by an 8.8 percent drop in the multi-family segment. Permits to build single-family homes slipped 1.8 percent.

Everywhere I go lately, I see new or barely "pre-loved" homes sitting empty in massive gluts, it seems. Up the street from me, there is a big condo complex that I believe was completed in 2009; I've only ever seen a couple of lights on in the entire set of buildings at night-- the whole thing is basically vacant, and this is in an area where a lot of people rent and there's a lot of demand.  (Basically, I live between the Pentagon and Langley, near to Tyson's Corner and very near to downtown DC-- you get a lot of diplomats, contractors, government workers here on 3-12 month assignments, military, and so on who like to rent in this area-- so filling units should, on the face of it, be relatively easy).  There's a big development in Issaquah, back in Washington, that looks like a freaking ghost town, though obviously someone built it thinking it would be fully occupied (and yes, I'll admit, gutting forest to build the damned thing seems like it was a real waste).  Issaquah is kind of an ideal base for commuters into Seattle, Bellevue, Redmond, etc., and the economy in the general Seattle area and the foreclosure rate is nowhere near as bad as what you'd find in a lot of the rest of the country.  Yet foreclosed upon, or never sold in the first place, these kinds of developments lie empty, emblematic of bad bets made even in environments that didn't look particularly risky (and which foreclosure stats indeed suggest were not especially risky, at least not compared to, say, urban areas in Nevada, California, Florida, etc).

Before the 2008 crash, we heard a lot of stories about people who owned multiple homes, which they intended to rent out (though it's not clear if they ever did) or flip to people who intended to rent them out. Hate to say, but my gut tells me that at least in some places, we may have too much housing either as a matter of course or specific current circumstances (i.e., a lot of cheap "used" property that has been foreclosed upon; a lot of people out of work and unable/unwilling to assume the responsibilities that come with owning a home and maintaining a mortgage).  If the economy ticks up, we may see concerns surrounding the housing market and construction decline. But my sense is, even if that happens, we may still observe more supply than demand.  [intro]

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