U.S. housing starts and permits for future home construction fell in April as an overhang of homes on the market discourages builders from taking on new projects, pointing to prolonged weakness in the housing sector.
The Commerce Department said on Tuesday housing starts dropped 10.6 percent to a seasonally adjusted annual rate of 523,000 units. March's starts were revised up to a 585,000-unit pace from the previously reported rate of 549,000 units.
Economists polled by Reuters had forecast housing starts rising to a 568,000-unit rate. Compared to April last year, residential construction was down 23.9 percent, the largest decline since October 2009.
Residential construction is being crowded out by an oversupply of used homes on the market, in particular, foreclosed properties, which sell well below their value.
Home builders' sentiment was flat in May, the National Association of Home Builders said on Monday.
Though builders expected a modest improvement in sales during spring, they anticipated market conditions to weaken in the next six months.
Groundbreaking last month was depressed by a 24.1 percent tumble in volatile multi-family homes, where starts for buildings with five or more units dropped 28.3 percent.
Single-family home construction fell 5.1 percent.
New building permits dropped 4.0 percent to a 551,000-unit pace last month. April's permits were revised down to a 574,000-unit pace and economists had expected overall building permits in April to remain unchanged at the previously reported 585,000-unit pace.
Permits were held down last month by an 8.8 percent drop in the multi-family segment. Permits to build single-family homes slipped 1.8 percent.
New home completions rose 4.1 percent to 554,000 units in April.
One of my clients is an electrical subcontractor in California. They do business with all the major home builders within California. Their over all business has remained relatively flat. The only reason they haven't seen sales decline is they were well positioned to land a couple of large multifamily jobs that started last year.
It's a double edge sword. A weak construction industry keeps people out of work and works against the economy. However, given the supply of real estate for sale and the pressure on values, do we really need a lot more building of homes now? Probably not, and probably not for a while!
I don't see the home building industry changing any time soon. It could easily be in a secular bear market for years to come. There are a few dynamics working against the industry.
First, as real estate values slide lower we could continue to have supply and shadow inventory problems compressing values, making if difficult for home builders to compete because in many cases it's cheaper to buy an existing home than build a new one, so demand for new homes could remain weak. Lastly, it's very difficult for builders to build a home where their costs are less than the market value of a built home leaving a net profit. If you can't build it and make money, then there is little reason to build it!
I don't expect much improvement in the home building industry in the near term. That being said, the title of the article should be "Weak Real Estate Values Point Confirm Construction Woes!" I think that more accurately captures the dynamics as they stand now!
Hope all is well.
J.D. Rosendahl, Rosey