Embattled homebuilders, who enjoyed a five-year boom, are now building new homes and apartments at a record-low pace, according to government data released Wednesday. New building permits, a barometer of future activity, also plummeted to the lowest pace on record.
With construction dropping, the number of unsold homes should fall quickly in the coming months, wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics. "But right now housing is a disaster area," he said.
The Commerce Department reported that construction of new homes and apartments fell 4.5 percent in October, the fourth straight monthly decline. Construction sank to an annual rate of 791,000 units from an upwardly revised September rate of 828,000 units.
The results were the lowest on government records dating back to January 1959. Previously, the slowest pace had been in January 1991, when the country was in recession and going through a similar housing correction. Analysts surveyed by Thomson Reuters had expected construction to fall even further to a rate of 780,000 units
Wachovia Corp. economist Adam York forecasts that construction will fall to around 650,000 units by next summer. While that's going to be painful for the nation's homebuilders, it will help stabilize the overall U.S. housing market, he said.
"The broader housing market needs fewer homes," York said in an interview. "We built too many homes in the United States and building less is one way to work off the excess inventory."
The declines in construction last month were led by a 31 percent drop in the Northeast, where construction of single family homes fell to a new record low. They also dropped 13.7 percent in the Midwest. Construction rose 7.5 percent in the West and 1.5 percent in the South.
Applications for building permits, considered a good sign of future activity, fell by 12 percent in October to an annual rate of 708,000 units, the weakest on records dating to early 1960. New permits for single-family houses fell 14.5 percent to 460,000, the lowest level since February 1982.
That decline was surprisingly large, wrote Global Insight economist Patrick Newport, adding that builders "will take a big hit from the financial problems that erupted in September," when the government seized control of mortgage finance companies Fannie Mae and Freddie Mac, and extended a financial lifeline to insurance company American International Group Inc.
The U.S. housing recession has triggered severe economic problems and calls for further action in Washington. Builders' sentiment about market conditions dropped to a record low in November, according to the latest survey from the National Association of Home Builders.
The trade group's housing market index, which started in January 1985, tumbled five points to nine in November, reflecting growing worries over the U.S. financial crisis, rising unemployment and weakening consumer confidence. Index readings higher than 50 indicate positive sentiment about the market. But the index has drifted below 50 since May 2006 and below 20 since April.
Tighter lending standards, rising defaults and fear about the housing market's future have sidelined homebuyers, an absence felt acutely by homebuilders such as D.R. Horton Inc., Pulte Homes Inc. and Centex Corp.
In recent weeks, homebuilders have ratcheted up pressure on Congress to take steps that go beyond trying to reduce foreclosures. The industry wants lawmakers to enact new incentives aimed at getting reluctant homebuyers back into the market.
Specifically, the group is asking for a 10 percent tax credit of up to $22,000 for homebuyers that purchase a home over the next year, and a temporary interest-rate reduction on 30-year mortgages.
And on Wall Street on Wednesday, shares in homebuilders took another beating as investors reacted to the government data. Shares of Lennar, D.R. Horton, Centex, KB Home and Beazer all tumbled 10 percent or more.