More Bumps in the Road Ahead for U.S. Housing Starts

But the worst news is that single-family permits—the key number in the report—are still falling off a cliff. Single-family permits have dropped 30% since financial markets froze up in August, and are down 57% from their September 2005 peak. They are trending down in all four regions, and show no signs of a turnaround.

Single-family permits are the best gauge of single-family home construction activity for at least three reasons. First, they are accurately measured. Second, they are not influenced much by weather. Third, they are a leading indicator of future construction activity. February's estimates point to substantial (more than 5%) drops in single-family starts—a market in deep recession—for at least the next three months.

The report also shows that construction activity is winding down. The number of new homes under construction fell to 1.028 million units, down from 1.208 million a year earlier. This number will continue to retreat over the course of 2008 because of the ongoing decline in housing starts, which also guarantees massive job losses in residential construction through year-end. Employment in this construction segment dropped 240,000 during the 12 months ended in February. Moreover, because this employment estimate does not include self-employed and temporary workers, the actual job losses in residential construction are probably much larger.

Over the past year, homebuilders have been slashing prices and aggressively cutting back on starting new homes. Single-family housing starts are down 62% from their January 2006 peak; they have tumbled 38% in the past eight months. Despite these dramatic adjustments, homebuilders have not cut back far enough. According to the Census Bureau, the number of new homes for sale was near an all-time high of 195,000 units at the end of January. Drops in home prices and housing starts are the adjustments that will bring inventories down. Our view is that the adjustments will come sooner rather than later, and that we are likely to see further ugly single-family housing starts numbers over the next three to six months, but then a rebound—provided financial markets stabilize—in the second half of this year.