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Upturn in Housing Starts Only Lasted 1 Month
Wednesday, June 18, 2008
There was a surprising one-month jump in new housing starts in April, which led some to believe that the slump had reached bottom. The May data show a 3.3 percent drop from downwardly revised April numbers, pushing starts to a new low for the downturn. The uptick in April had been driven by an increase in starts in multi-family units. This increase was largely reversed in May, as multi-family starts fell 10.5 percent.
Starts of single-family units edged down by 1.0 percent, continuing a pattern of decline that began in March of last year. Starts of single-family units are now down by 41.2 percent from their year ago level.
By region, only the Northeast showed an upturn. Single-family starts in the West fell by 18 percent. They are now down by 69.6 percent from their 2005 year-round average.
As noted before, the sharp downturn in starts is actually good news. There is a huge excess supply of housing at the moment, which just keeps expanding due to the flood of foreclosures. This inventory will most quickly be eroded if builders stop building new units. The sharper the downturn in construction, the quicker the inventory of homes on the market moves back to normal levels.
One piece of especially ominous news on the buy side of the market is the sharp rise in mortgage interest rates in recent weeks. The Mortgage Bankers Association (MBA) reported today that the average interest rate on 30-year fixed rate mortgages last week was 6.57 percent, up from 6.24 percent the prior week. Rates had been under 6.0 percent as recently as last month and under 5.5 percent at their troughs in the winter.
This is still a relatively low rate by historical standards and it is certainly a low rate in the context of 4.0 percent inflation, but the increase is still not good news for the housing market right now. With more inflation in the pipeline due to the falling dollar, it is more likely that interest rates will be trending higher rather than lower over the rest of the year.
Higher interest rates will also put a dent in refinancing. The MBA refinancing index fell 15.0 percent last week. Refinanced mortgages now account for just 37.4 percent of all mortgages. They had accounted for more than half of all mortgages just a couple of months ago. In addition to higher interest rates, this falloff is also due to the fact that, increasingly, homeowners no longer have equity in their homes that they can tap, eliminating an important incentive for refinancing.
The housing market is also likely to see additional weakness in the second half of the year as a result of the weakness of the labor market. The pattern of job loss seen over the last five months is likely to continue, and possibly accelerate in the months ahead. A weak labor market is not conducive to home buying. Millions of workers are now fearful of losing their jobs, and tens of millions are struggling to pay bills already, as their wages fail to keep pace with rising food and energy prices.
In short, there is very little reason to expect any turnaround in the housing market any time soon. The continuing plunge in house prices will accelerate the pace of foreclosures in the second half of the year as the number of homeowners with negative equity soars and the extent to which these homeowners find themselves underwater increases. Homeowners may struggle to meet the mortgage on a home in which they are $10,000 underwater at the moment. They are less likely to make sacrifices to keep a home on which they are $100,000 underwater. Many more homeowners will find themselves in this situation by the end of the year.
With more foreclosed homes coming on the market, higher mortgage interests, and a weakening labor market, it is virtually certain that price declines will continue through 2008 and into 2009.
By Dean Baker