Builders are breaking ground on fewer properties now that a key housing stimulus has been pulled from the market.

Housing starts fell 10 percent in May from April but remain 8 percent above year-earlier levels, the Commerce Department said Wednesday. The monthly drop was significantly steeper than economists had expected. Still, starts remain 24 percent above their April 2009 lows.

"The weakness in housing starts today was driven entirely by single family starts, which fell...17.2%, to 468,000 from 565,000, completely reversing the 5.6% gain in April," Theresa Chen of Barclays Capital said in a report. Multi-family starts, which represent a significantly smaller portion of total home construction, jumped 33 percent from the previous month. (Multi-family starts, however, tend to be volatile.)

Housing starts had increased in March and April, as builders ramped up production to meet anticipated demand tied to a federal tax perk. Uncle Sam had been offering tax credits worth up to $8,000 to home buyers who signed a sales contract by April 30 and closed the transaction by the end of June. But in the weeks since the deadline has passed, home-buying activity has fallen sharply. Home-purchase mortgage application volume plummeted in the five weeks following the tax credit's deadline. And just yesterday, a survey of home builder confidence posted its most severe monthly drop since November of 2008.

"These data support the notion that the home-buyers tax credits have provided an artificial prop to...home-building and appears to have resulted in an inter-temporal shift in activity that has concentrated building in the recent past at the expense of the next few months," David Resler, the chief economist at Nomura Securities, said in a report.

What's more, Wednesday's report indicates that construction will weaken further from here, as permits to build single-family homes fell 10 percent in May from April. "The second successive monthly decline in single-family housing permits in May indicates that the payback has further to run first," Nigel Gault, the chief U.S. economist at IHS Global Insight, said in a report.

Brian Wesbury, the chief economist at First Trust Portfolios, suggested that the oil spill in the Gulf of Mexico could have played a role in the decline in housing starts. He noted that single-family housing starts in the southern region of the United States fell 27 percent last month, a record decline. "We don't think it's a coincidence that the South is the region most influenced by the BP oil disaster. In addition, the South was hit by major flooding in May," Wesbury and a colleague said in a report. "We can't help but think that, besides the flooding, the disaster has hit the Gulf region with a sudden bout of risk aversion, similar to a financial panic."

The economy needs to add jobs to facilitate a housing recovery, Gault argues. "Interest rates and house prices are both low, but credit remains tight and there's still an over-supply of homes on the market," he said. "We think that rising employment will lead to a gradual improvement in housing activity over the second half of the year."

 

 

Recent Real Estate Articles

 

Real Estate - Builders Break Ground on Fewer Homes

(c) 2010 U.S. News & World Report