The Wall Street Journal-20080118-Housing Starts Fall to 16-Year Low
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Housing Starts Fall to 16-Year Low
Home construction plunged last month to its lowest level in 16 years, as builders cut back and their lenders grew wary amid rising delinquent construction loans.
Housing starts plunged 14.2% in December to a seasonally adjusted annual rate of 1.006 million, the slowest pace since 996,000 starts in May 1991. Permits, an indicator of future construction, tumbled 8.1% to a 1.068 million pace, the Commerce Department said.
While builders have been scaling back for many months, some said the end of 2007 was the bleakest period yet in the slump, forcing them to make sharp cutbacks.
"The last quarter was the most challenging environment since the downturn started in July 2005," said Douglas Smith, president of Miller & Smith, a builder in McClean, Va., which sold 350 homes last year. "All of the ramifications from the mortgage meltdown really took hold."
Mr. Smith said many buyers walked away from homes that had been started because they couldn't obtain financing. That left him with standing inventory to sell. "The mortgage crisis has really educated builders," he said. "We are all recognizing that we need to get supply in line."
At the same time that banks are tightening mortgage lending to home buyers, some are also scaling back construction loans to builders. As construction-loan delinquencies mount and more small to medium-size home builders veer toward bankruptcy, lenders are tightening credit for new developments. One large lender, IndyMac Bancorp Inc., said it funded no new home-builder loan commitments in November or December, "as we continue to focus our efforts in this division on workouts."
"Many builders are not only realizing that they need to cut back, they are being told they have no choice," said Mark Zandi, chief economist at Moody's Economy.com.
Such tightening may help explain the drop-off in permits, as builders plan fewer developments and slash their labor forces.
Hovnanian Enterprises Inc., the large Red Bank, N.J., builder, has cut the number of unsold homes, or "spec homes," that it has started by 23% since July. Builders typically build a sizable number of spec homes to offer to buyers who need to move into a home quickly. Hovnanian, like many builders, is being cautious about starting such homes because it needs to conserve cash to pay down its debt. "You don't want to tie up that cash in unsold vertical construction," said Larry Sorsby, Hovnanian's chief financial officer.
The biggest drop in construction starts last month were among multifamily units, which plunged 40%, while single-family home starts fell 2.9%.
Federal Reserve Chairman Ben Bernanke, testifying before the House Budget Committee, said housing will probably subtract more than one percentage point from the nation's economic growth in the fourth quarter, and "may continue to be a drag on growth for a good part of this year as well."
Economists agreed that the weaker-than-expected housing report was worrisome. "Housing's contribution to economic growth will be substantially negative" again, in both the fourth quarter of 2007 and the first quarter of this year," said Insight Economics analyst Steven Wood.
Lehman Brothers economist Michelle Meyer said the housing data suggest that gross domestic product grew at a slim 1% annual rate in the fourth quarter.
Meanwhile, a report issued by the Federal Reserve Bank of Philadelphia yesterday showed that the manufacturing activity in the mid-Atlantic region contracted sharply in January, reflecting a steep drop in orders. It was the worst reading since October 2001.
Meanwhile, the Labor Department said the number of workers filing new claims for unemployment benefits fell last week to its lowest level in nearly four months. Initial jobless claims fell 21,000 to 301,000. The four-week average of new claims, which economists use to smooth out weekly volatility, decreased 11,750 to 328,500.
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Jeff Bater contributed to this article.
