An Overhang of New Houses?

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December 20, 2005

An Overhang of New Houses?

Peter Coy

Just when it looks like housing construction is finally going to cool off we get another number like today's stat from the government. Construction began in November on 2.12 million privately owned homes (seasonally adjusted). That's up from 5.3% from October and 17.5% from last November.

And it doesn't look like this is the end of it, either, because permits are up, too. Permits were issued in November for 2.15 million housing units, which is up from October and from a year earlier.

This is great news for buyers. It means the supply of housing is increasing, which means sellers are going to have to compete harder for your business.

It's not such great news for homeowners who are looking to sell, or for the builders themselves.

The more bullish analysts are saying that housing still has plenty of room to run. Here's what Action Economics said about the Census Bureau report this morning:

[T]he U.S. starts report revealed another stellar performance in November .... A housing sector correction will clearly remain a big risk through this business cycle. But, there is no meaningful evidence that this correction will emerge anytime soon.

High Frequency Economics, which is more bearish on housing, called the numbers a surprise but added that construction numbers take a while to respond to changes in the economy:

The bottom line here, though, is that construction activity lags changes in demand; mortgage applications and sales are the key data.

It's worth pointing out that just yesterday, the National Association of Home Builders came out with a negative report. saying that the confidence of home builders fell again in December from its summer peak. The latest level of the NAHB/Wells Fargo Housing Market Index is 57, down from a June high of 72.

Here's what David Rosenberg of Merrill Lynch said about the home builders' survey:

Taking a long view on this index, even at 57 it still remains high, but the downward move from the high of 72 in June cannot be ignored. Within the details the big decline came in prospective buyer traffic, which fell 7pts. This would seem to confirm the concern of many homebuilders who recently cut sales forecasts for next year; little wonder with housing affordability measures deteriorating. The present single family home index fell 4pts which points to some slowing in housing starts for December.

It feels to me like the buyer's market is flipping over into a seller's market.