February 20, 2008 (Housing Market Monitor)

Housing Market Monitor

Housing Starts Fall to Quarter Century Low in West  

February 20, 2008

By Dean Baker

"Mortgage interest rates jumped from 5.72 percent to 6.09 percent last week." 

As bad as the housing market has been, it is continues to worsen. The January data on housing starts showed a modest gain of 8,000 starts from December’s dismal showing. However, even this slight improvement presents too optimistic a picture. All the gains were in starts of multi-family units. Starts of single family units dropped by 41,000 to 743,000, the lowest level since April of 1991.

Unusually good January weather in the Northeast and Midwest may have also skewed the data. Starts fell by 16,000 to 530,000 in the South and by 13,000 to 197,000 in the West. The number of starts in the West is the lowest since August of 1982, when 194,000 units were started. The decline in both regions has been sharpest for single family units. In the South, starts are down by 52.1 percent from their 2005 level, while in the West the decline has been 73.3 percent since 2005.    

The sharp drop in starts is a positive sign, since it indicates that the industry is responding quickly to the falloff in the market, but it also demonstrates the extraordinary depths of the current slump. There is little reason to believe that a turnaround is imminent as all evidence suggests that the glut of housing will persist until prices have fallen much more sharply.  

Foreclosures were running at more than a 1.8 million annual rate in the fourth quarter. This is more than half the 3.5 million annual sales rate for existing homes in the mid-nineties, before the bubble took off. While not all of these foreclosures end up as homes for sale on the market, the overwhelming majority do. This means that there will continue to be a substantial supply of homes for sale regardless of how much builders cut back new construction and current homeowners put off selling. The slight improvement in the builders index this month, from 19 to 20, should be taken as re-enforcing the view that conditions are very bad, rather than as evidence that the market is turning up.

The demand side does not look any better. After having been absurdly loose during the boom, lenders are now rapidly shifting in the other direction. There are reports of lenders in formerly hot markets requiring down payments of 20 percent. If this becomes the norm it will virtually wipe out the buy end of the market. Last year at this time, homebuyers could easily arrange purchases with 100 percent financing. Now these same homebuyers may have to come up with a $60,000 to $80,000 down payment for a house. This requirement will exclude the vast majority of potential buyers from the market.

Making matters worse is the upward course of long-term interest rates. The Mortgage Bankers Association reported this morning that the average interest rate on a 30-year fixed-rate mortgage jumped to 6.09 percent last week from 5.72 percent the previous week. Not surprisingly, the weekly index showed a sharp drop in applications for both refinancing and purchase mortgages, which fell 27.9 percent and 11.5 percent, respectively, from the previous week’s numbers.

The rise in mortgage rates is consistent with the movement of the 10-year treasury rate. This rate is now hovering close to 3.9 percent after having been as low as 3.35 percent in mid-January. The Fed’s rate cuts appear to be contributing to this upward trend. The 10-year treasury rate jumped 6 basis points two weeks ago in response to the last 50 basis point rate cut. If the Fed cuts further, as is widely expected, then the result could be still higher treasury rates and mortgage rates. Presumably the markets are responding to fears of inflation and a falling dollar.

It is important to remember that the downturn in the housing market thus far is due almost entirely to the dynamic of a collapsing bubble, as employment had remained relatively strong. However, the housing slump is about to be deepened by the impact of the recession. With workers losing jobs, and tens of millions of others fearful of their job prospects, the number of homebuyers in the market will fall even further in the months ahead. 

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

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