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Homebuilders missing out on economic recovery

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DEREK KRAVITZ
May 17, 2011
— For homebuilders, it hardly feels like an economic recovery.

Nearly two years after the recession ended, the pace of construction is inching along at less than half the level considered healthy. Single-family home building, the bulk of the market, has dropped 11 percent in that time.


Builders are struggling to compete with waves of foreclosures that have forced down prices for previously occupied homes. The weakness is weighing on the economy: Though new homes represent a small portion of overall sales, they have an outsized effect on jobs.


The Commerce Department said Tuesday that new-home construction plummeted in April to a seasonally adjusted rate fell to 523,000 homes per year. The monthly decline was largely pulled down by a large drop in apartment building. Strong tornadoes also disrupted construction projects throughout the South.


Still, through the first four months of this year, the pace of new-home construction is barely ahead of 2009's the worst year on records dating back a half-century.


The disappointing construction data contributed to a sell-off on Wall Street. The Dow Jones industrial average fell more than 150 points in mid-day trading.


Stocks also fell after Hewlett Packard lowered its earnings outlook for the rest of the year and the Federal Reserve said temporary parts shortages out of Japan led to the first decline in factory output in 10 months.


The April decline in new-home construction was largely because apartment and condominium building plunged more than 28 percent. Single-family home construction, which makes up roughly 80 percent of the market, fell about 5 percent.


Building permits, a gauge of future construction, fell 4 percent.


"The underlying trends, as far as we can tell, are about flat, at a very low level," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.


High unemployment and tighter lending standards have greatly reduced the number of potential buyers who could qualify for a mortgage. And those who are eligible have more incentive to buy a previously occupied home.


The median price of a new home was about 34 percent higher in March than the median price for a re-sale. That's more than twice the markup in healthy housing markets.


In some cities, prices are half of what they were before the housing market collapsed in 2006 and 2007. Many potential buyers who could qualify for loans are worried that prices will fall further. Others are hesitant to put their own homes on the market when prices are dropping.


Several violent tornado outbreaks across the South led to big drops in construction activity in April, analysts said. Reconstruction efforts might lead to a "bounce back in May," according to Paul Dales, senior U.S. economist at Capital Economics.


Harsh weather also hampered sales at Home Depot and Lowe's Cos. The nation's biggest home improvement retailers both said revenues fell in the February-April quarter. The worsening housing market and higher gas prices also cut into their sales.


The housing market has traditionally powered economic recoveries. Each new home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the builders' group.


In past modern-day recessions, housing accounted for 15 to 20 percent of overall economic growth. In the first post-recession year, between 2009 and 2010, housing contributed just 4 percent to the economy.


Home construction activity was uneven across the country. It fell 23 percent in the South and nearly 5 percent in the Northeast but rose almost 4 percent in the West and nearly 16 percent in the Midwest.


On Monday the National Association of Home Builders said its survey of homebuilder sentiment was unchanged at 16. That's the same level it has been for six of the past seven months. Any reading below 50 indicates negative sentiment about the market. The index hasn't been above that level since April 2006.


And when asked about where they see sales of single-family home heading over the next six months, the builders surveyed offered their most pessimistic outlook since September.



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