Housing improves, but foreclosures spoil the party

By John W. Schoen, Senior Producer

It looks like the housing market isn’t going to get any worse.

Five years into the worst housing depression since the 1930s, the latest monthly data from the Census Bureau indicate that the homebuilding industry is slowly coming back to life. Housing starts jumped 9.3 percent in November to an annual rate of 685,000, the highest reading in 19 months. Starts were up in the Northeast, South and West but were down in the Midwest. New housing permits, which offer a fairly reliable forecast of future building activity, jumped 5.7 percent to the highest level in 20 months.

Much of the construction activity and new permit volume was for multi-family housing, as the heavy pace of foreclosures sends displaced households looking for homes to rent. Rental vacancy rates have been falling and rental prices rising, spurring investors to break ground on more multi-family units.

“The single-family market is finally getting off the mat,” stated Patrick Newport, a housing economist at IHS Global Insight. “The multi-family segment is continuing to make small strides, and we should anticipate good housing starts numbers in the upcoming months.”

The November data follow a series of reports showing gradual but steady improvement in new home construction. Record low mortgage rates have made those homes more affordable. And a slow improvement in the job market has created more paychecks to cover those mortgage payments.

Home builders – those that survivedthe housing bust – have reported in surveys that they’re getting more optimistic about the market. A survey released Monday found that builder sentiment edged up in December for the third month in a row to the highest level in a year and a half.

“The (housing starts) increase, coupled with the improvement in home builder sentiment over the past few months, suggests the housing market may finally be breaking out of the ‘bounce along the bottom’ environment that housing has been stuck in since early 2009,” stated Nomura Ellen Zentner.

But that bottom was so deep the housing industry has years of rebuilding ahead of it.

After peaking at 2.3 million in January 2006, the annual pace of housing starts crashed to less than 500,000 in April 2009. By way of comparison, housing starts had averaged roughly 1.6 million a year during the five decades before the housing bubble burst in 2007. Even if the current recovery holds, housing starts won’t cross the 1 million mark before 2015, according to housing economist Paul Diggle at Capital Economics.

“There are more than four million vacant or soon to be foreclosed homes that will come onto the market over the next few years,” stated Diggle. “Although foreclosures are not perfect substitutes for new builds, home builders will continue to struggle to compete on price with forced foreclosed sales.”

Those foreclosures continue to push home prices lower.

After leveling off this summer, prices began falling again this fall – down 7.5 percent, on average, in the third quarter. Even if those prices start to stabilize again soon, it will be many years before buyers start to see the kind of price appreciation usually associated with a healthy housing market.

In the US, housing starts increased 1.1 percent to a 10- month high of 635000 at an annual rate in November, with CNBC’s Rick Santelli.

Though low mortgage rates and better job prospects have helped, several forces continue to depress demand for housing. Falling prices have left some buyers waiting for convincing signs of a price floor.

Falling prices have also sidelined an estimated 15 million home owners who now owe more on their mortgage than their home is worth. Unless they can get their lender to concur to forgive the difference, they’re unable to move up or move out without turning over a massive chunk of savings to the bank.

The housing bust and weak economy have also put a huge dent in the pace of new household formations, which slowed to a crawl in 2008, according to Census data. High levels of unemployment have forced some families to double up; younger potential home buyers have postponed forming new households.

After peaking above 7 million in 2005, the annual rate of existing home sales remains stuck below 5 million, according to the National Association of Realtors. It remains to be seen just how far below that level the pace has fallen. Some 10 months after housing industry analysts challenged the trade groups numbers, the NAR conceded that its data was flawed and had overstated the pace of sales since 2007.

The NAR is set to release revised data on Wednesday.

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Submited at Wednesday, December 21st, 2011 at 2:00 pm on News by madison
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