By Dean Baker

October 21, 2009

Housing starts have been essentially flat for the last three months.

After rebounding from the extraordinarily low levels of last winter, housing construction seems to have stabilized over the last three months. Starts were at a 590,000 annual rate in October, the same level as June and also the average for the last two months. Starts of single-family homes have increased slightly over this period, rising by 4.8 percent from their June level. Starts in buildings with 5 or more units fell by 22.8 percent.

Starts fell everywhere between June and September except in the South, which had an 8.7 percent increase. Starts were flat in the Midwest. They fell by 9.5 percent in the West over this three-month period and by 14.8 percent in Northeast.

The story is essentially the same with permits. Permits fell by 1.2 percent from August to September, and are up just 0.3 percent from their June level. Permits for single-family homes rose 3.9 from June to September. Permits fell in both the South and the West in September, while remaining flat in the Northeast and Midwest.

Starts are now up 23.2 percent from their April low, with permits up 15.1 percent. The current start rate is still less than 30 percent of the peak rate hit in 2005, but there is no reason to expect it to increase substantially any time soon. With an enormous inventory of unsold homes, builders are likely to only undertake construction in narrow niches with a demonstrated market. Construction is unlikely to return to a more normal rate until at least the middle of 2011.  

On a more encouraging note, it appears that the pace of foreclosures may finally be slowing. According to MDA Data Quick, notices of default in California were down by 10 percent compared with the second quarter, although they were up 18.5 percent from the third quarter of 2008. Actual foreclosures were down by 37 percent from their year ago level, although they have been rising modestly in the last two quarters. These figures present a mixed picture on mortgage modification plans. The modification plans probably have slowed the rate of foreclosure slightly in California, one of the hardest hit states in the country, but foreclosures are still occurring at a rate of close to 200,000 a year.

The purchase mortgage applications index fell 7.6 percent last week after also falling the prior week. This index now stands 3.4 percent below the level of a year ago. This is consistent with many home purchases having been moved forward as a result of people seeking to take advantage of the first-time buyers tax credit. With the credit scheduled to expire at the end of November, buyers can no longer count on a contract being concluded prior to the expiration date.

This falloff is certainly consistent with a situation in which many people were induced to buy homes in the summer and early fall who otherwise might have purchased their home later in the year or 2010. One implication of this situation would be that even if the credit is extended it will have little impact on sales since the pool of potential first-time buyers has been substantially reduced.

It is likely that house prices may see renewed downward pressure with fewer first-time buyers in the market. Also, many sellers who had delayed putting their homes on the market may no longer have the ability to delay selling further. And there continues to be a large supply of foreclosed homes.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.