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Housing starts decline sharply

Construction on new homes unexpectedly falls 10.6% in October from the prior month.

November 19, 2009|Alejandro Lazo

New-home construction fell sharply last month, underscoring the fragility of the fledgling housing recovery.

Housing starts unexpectedly fell 10.6% to a seasonally adjusted 529,000 annual rate in October compared with the prior month, the Commerce Department said Wednesday. That was a 30.7% drop from October 2008.

Analysts were caught off guard by the news because many had expected an increase in new construction. Patrick Newport, U.S. economist for IHS Global Insight, called the plunge a shocker in a note to clients.

Housing starts in the West, including California, fell 8.5% to a seasonally adjusted 108,000 annual rate in October compared with the prior month.

The stumble probably reflected trepidation from the building industry in October as uncertainty remained over whether Congress would extend a popular but controversial $8,000 tax credit for first-time buyers beyond its Nov. 30 deadline.

Congress this month extended the credit through April and expanded it to include move-up buyers.

"If you are a builder, and you don't know if this tax credit is going to get renewed . . . what's the rational, prudent business decision to make? Stop swinging the hammers a little bit and see what happens in Washington," said Michael Larson, an industry analyst for Weiss Research.

The tax credit for first-time buyers appears to have played a role in bolstering Southern California home prices and sales volume during the traditionally slow fall months.

In October, the median price paid for all homes in six Southland counties rose to $280,000, up 1.8% compared with the previous month, and the number of homes sold increased 2.8%, San Diego research firm MDA DataQuick reported Tuesday.

Meanwhile, real estate agents have reported renewed interest in Southern California's move-up market after the government's incentive for first-time buyers was extended to include a $6,500 tax credit for current homeowners looking to buy.

But whether that extension will translate into sales remains a subject of debate.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, wrote in a weekly analysis Wednesday that the expansion of the credit is not likely to have much of an effect.

"Most current homeowners who opt to take advantage of the tax credit will put their home on the market, leaving no net change in the balance between supply and demand," Baker wrote.

Larson, the Weiss analyst, disagrees. All the government's efforts to bolster the housing market -- including expanding and extending the tax credit, keeping interest rates low, providing financing for more expensive homes and increasing the role of the Federal Housing Administration in mortgage markets -- will continue to yield results in the months to come, he said. Home prices also have dropped so steeply that buying has become more affordable in several markets.

"It made no sense to buy a house from a financial standpoint because it would cost twice as much in some markets to buy a house than it would to rent," Larson said of the bubble years. "A lot of that disparity has now been fixed."

The number of new building permits last month also fell, by 4%, to a seasonally adjusted annual rate of 552,000 from the previous month, the Commerce Department said. The permits fell 24.3% from October 2008.

The number of homes completed in October increased 1.9% to a seasonally adjusted annual rate of 740,000 from the previous month but dropped 29.9% from October 2008.

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alejandro.lazo@latimes.com

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