Housing Starts: Don't Expect Much

Because of bad weather and short length, February is a traditionally weak month. Analysts are more concerned about March's numbers

After a week plagued by economic uncertainty, the report due out Mar. 20 on February housing starts kicks off a week jam-packed with fresh economic data. Better-than-expected news from the U.S. Census Bureau may inject some much-needed optimism into the markets, but a disappointing result could worsen anxiety over the spreading subprime mortgage mess.

So far, the odds for a sudden boost in sentiment aren't looking too favorable. On Mar. 19, the National Association of Home Builders said builder confidence receded in March. After showing small but consistent gains since its low in September, 2006, the NAHB/Wells Fargo Housing Market Index (HMI) declined three points during the month to 36, from a downwardly revised 39 in February. Analysts had been expecting a reading of 38. Any HMI number below 50 indicates that more builders view sales conditions as poor than good.

The NAHB is still forecasting "modest improvements" in home sales in 2007, but NAHB Chief Economist Dave Seiders says recent mortgage woes have increased the degree of uncertainty surrounding this forecast. In the March monthly survey used to calculate the HMI, the NAHB asked builders whether they have noticed the effect of tighter lending standards on the sales of newly constructed homes. Fifty percent of respondents said they saw "no impact," while 26% saw "some impact" and 7% saw "significant impact" (18% answered "not sure").

Up from Rock Bottom?

"I was surprised that by early March we had that many responses [seeing 'some impact']," Seiders says. "Maybe it's because of what they've heard in the media—I'm not sure." At this point, it's just too early to determine how increasing defaults on subprime and other loans will affect the broader housing market and the economy at large, Seiders adds. As for February housing starts, the NAHB economist expects to see little change in the numbers over January levels.

Homebuilders may have one thing going for them: A record-breaking plunge in housing starts last month may have left them with nowhere to go but up. On Feb. 16, the Census Bureau announced a 14% drop in January starts on home construction vs. the December level, bringing the rate of housing starts to its lowest level since 1997. The market expects February housing starts to rise 3% to a seasonally adjusted annual rate of 1.45 million from 1.408 million in January.

"I wouldn't be surprised if the increase was under 3%," says Pat McPherron, a housing economist at Moody's Economy.com. February is rarely a hot month for housing starts, McPherron explains, and with the cold weather last month, a low-percent increase or decrease would hardly come as a shock. The real problem, if there is one, will show its face in March. This is when the "big season" for housing demand begins, as home buyers want to move by summer and look at how roofs and basements fare in the damp and rainy weather.

Buyer Traffic at 16-Year Low

"People understand when February is not great; what they don't understand is when March is not good," says McPherron. Regardless of what the Mar. 20 housing starts report reveals about February, March is already turning out to be a rotten month for homebuilders, as the NAHB Housing Market Index movement shows. The component of the HMI that measures how builders rate traffic of prospective buyers dropped from 29 to 28 in March. This might not seem like a huge decrease, but 28 is the lowest reading since 1991.

Fed policy makers also begin a two-day meeting Mar. 20 to discuss a potential increase in interest rates. The market anticipates that rates will remain unchanged for the sixth straight time, but even this "best case" scenario would still weigh heavily on housing demand.

"People have been looking for the bottom, but they probably just found out it's not there," McPherron says. "It's not going to be a good spring."