Wednesday, November 18th, 2009
Real Estate Stocks Slide on Housing Starts Report
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NVR, Inc. (NVR), KB Home (KBH), Standard Pacific Corp. (SPF) and other homebuilders moved lower after a government report showed that housing starts slumped in October.
Housing Starts Drop Unexpectedly
Housing starts fell short of expectations, dropping to a seasonally adjusted 529,000 in October from 592,000 a month earlier. Many economists were projecting the indicator to rise to 600,000 for the month in what would have been a continued recovery. Meanwhile, building permits also dropped to 552,000 from 575,000 in September, which was below a 580,000 expectation.
Mixed Signals for the Industry
The drop in housing starts is considered by many to be good news for the industry, as it means that supply will remain relatively constrained and help prices move higher. However, the news is bad for the economy as it signals that consumer demand is perhaps not as strong as initially anticipated. In fact, some economists are even calling for a so-called “double dip recession.”
Other economists remain even more bearish on the overall market prospects. These parties insist that the current economic crisis stemmed from overleveraged banks and over indebted citizens, and this problem has only been exacerbated through the government’s actions. As a result, they believe that the economy is in even worth shape and share the belief in a double dip recession.
Looking Ahead in Real Estate
U.S. real estate prices remain near record lows, despite government incentives and record low interest rates. The reason is simply a lack of demand due to a consumer facing the twin issues of high unemployment and tightened credit from banks. Moreover, many consumers are reluctant to buy until they are confident that price erosion will slow or reverse.
As a result, confidence by homebuilders remains extremely low, especially amid concerns that the government will allow its home buyer tax credit to expire. In fact, the National Association of Home Builders index of confidence came in at 17 for a second month, with any reading below 50 signaling that respondents view the conditions as poor going forward.
Recently, a surge in orders for new residential homes has helped to buoy the industry, but today’s report sheds some doubt as to whether or not that trend will continue. As a result, many investors are choosing to wait on the sidelines before substantially putting bets on a recovery in the industry in the near future.
Key Points
- Housing Starts and Building Permits fell below expectations for the month of October, signaling that residential construction may be slowing once again.
- Homebuilders and others in the industry remain concerned about the expiring government tax credit and continued weakness among consumers.
- The housing market will likely take longer than expected to recovery as consumers will need to pull themselves out of debt and regain confidence.
Written by Simon Monger
