Housing Starts Perk Up in November

A surprising uptick in new home construction may pave the way for stabilization in 2007, but the market still shows signs of weakness

After months of sharp declines, housing starts exhibited faint signs of revival last month. According to the U.S. Census Bureau's report on Dec. 19, total starts edged up 6.7% in November to a seasonally adjusted annual rate of 1.59 million units.

Housing starts rose for the last time in September; May and January also saw small increases. The November news—though far from momentous—offsets the grim mood set in October, when starts on new homes plummeted 14.6% to 1.49 million, the lowest level in more than six years.

Why the sudden adjustment? "The economic indicators—interest rates, energy prices, income—are all pretty good, and the consumer fear of a long price decline is subsiding," says Gopal Ahluwalia, head of research economics for the National Association of Home Builders.

Better Than Expected

Unseasonably warm weather and decreasing inventory also contributed to the surprise boost. "There was less going into the inventory, and more coming out," said Raemeka Mayo, a survey statistician with the Census Bureau. The data reflect some of the slightly less negative comments from some homebuilders in recent weeks (see BusinessWeek.com, 12/6/06, "Toll Brothers: Scraping the Bottom").

Economists had been projecting a negligible November increase of 2.7% to a rate of 1.53 million. While the rate came out better than expected, it would still be premature to call this an upswing, due to the very wide margin of error for government housing data. "It's hard to say concretely if it was up or down," says Mayo, citing the data's plus- or minus-10 margin of error. Compared to last year, housing starts remain at record low levels. The November, 2006, rate marks a 25.4% year-over-year decline from the November, 2005, rate of 2.13 million. Monthly housing starts have not topped 2 million since February, 2006.

"Predicting Stabilization"

Elsewhere in the Dec. 19 government report, building permits fell another 3% in November to a seasonally adjusted annual rate of 1.51 million, marking the 10th straight decline and the lowest rate in nine years. By region, housing starts rose 8.6% in the Northeast and 18.5% in the South. Starts fell 6.3% in the Midwest to the lowest level in 15 years. In the West, starts fell 8.1% to a five-year low.

The NAHB announced on Dec. 18 that its housing market index had fallen to 32 in December from 33 in November. However, the index still lingers above its low in September of 30, and the index for future sales of single-family homes rose in December to 48 from 45, the highest since June. The NAHB index is a diffusion calculation based on a survey of homebuilders. Readings below 50 mean more builders view market conditions as poor rather than favorable.

"As we go into the next year housing starts will be picking up," says Ahluwalia of the NAHB. "We are predicting the stabilization of the market."

Before it's here, it's on the Bloomberg Terminal.