Weak Demand & Tight Credit Keeps Builders On Sidelines
Luke Mullins

 

Feeble buyer demand remains a key obstacle to a revival in the residential construction industry

Builders broke ground on fewer new homes than expected last month, as weak buyer demand continues to hogtie a revival in the residential construction industry.

June housing starts fell 5 percent from May to remain 6 percent below year-earlier levels, the Commerce Department reported Tuesday. Meanwhile, building permits increased 2 percent from the previous month but fell 2 percent from June of 2009.

Mike Larson of Weiss Research says the report shows that the home construction market remains "moribund" and that conditions won't improve anytime soon. "There is always going to be some level of [housing] starts," Larson said. "But it is going to be a very low level for some time."

Cheap mortgage rates and lower home prices haven't been enough to trigger a sustainable real estate recovery, as near 10-percent unemployment, tight lending standards, and an uncertain economic outlook have kept would-be buyers on the sidelines. Sales of new homes plummeted to all-time lows in May--the first month after the expiration of a popular tax credit for home buyers.

As a result, builders have cut back on home construction. "Builders remain very cautious in light of the sluggish pace of the economic recovery and the hesitancy they are seeing among potential home buyers," National Association of Home Builders Chairman Bob Jones said in a statement.

What's more, builders who can work up the confidence to take on new projects are finding it increasingly difficult to get financing. "If you think it is hard to get a mortgage to buy a house, put yourself in the shoes of a developer trying to throw up a subdivision," Larson said in an interview. "It is really tough to get that kind of financing."

Economists were quick to point out that much of the decline in total housing starts was driven by a sharp drop in multifamily starts, which can be volatile. "The report thus has a less negative cast than suggested by surface indicators," economists at Goldman Sachs said in a report.

Single-family starts, which make up the bulk of the home building market, fell less than 1 percent in June from May. The figure suggests that "single-family starts may be finding a bottom following the expiration of the homebuyer tax credit in April," Michael Gapen of Barclays Capital said in a report.

Single-family permits, however, fell 3 percent in June from a month earlier. "The drop is probably all related to the second home buyer's tax credit, which stimulated new construction early this year," Patrick Newport of IHS Global Insight said in a report. "The drop implies that single-family housing starts will drop again in July."

A recovery in sales and home building depends on job growth, Larson says. "Cheap mortgage rates and cheap homes should help ease the housing market's pain," Larson said in a report. "But until we see signs of life in the labor market, we're just not going to see a robust recovery--only more malaise."

Newport agrees. "The household formation rate will pick up once job growth takes off," he said. "Increases in the household formation rate, in turn, will reduce the housing glut, and this will stimulate new construction."

Newport expects the economy to add roughly 800,000 jobs this year, 2.7 million jobs next year, and 3.5 million jobs in 2012.

 

 

Weak Demand & Tight Credit Keeps Builders On Sidelines

 

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