Sharp Drop in Housing Starts Adds
To Fear of Wider Economic Impact
By CHRISTOPHER CONKEY and JAMES R. HAGERTY
February 17, 2007
A sharp drop-off in new-home construction is adding to concerns that the housing downturn's impact could linger well into this year and eventually seep into the wider economy.
Builders slashed construction of new homes last month to the lowest level in nearly a decade, a move that underscores the severity of the sector's slump and signals it will likely continue to be a drag on the economy at least through midyear. The slip in homebuilding last year subtracted more than 1 percentage point from inflation-adjusted economic growth over the second half of 2006.
Monthly home-construction readings are volatile and prone to weather-induced fluctuations, and last month's plunge may somewhat overstate the market weakness. But signs of deterioration in riskier segments of the home-mortgage market, along with stagnant or declining home prices in many parts of the country, provide additional reason for concern.
The plunge in new homebuilding activity in January -- down 14.3% from December and 37.8% from January 2006 levels -- could eventually hasten a recovery by reducing the overhang of unsold homes, however.
So far, the weakness in housing has yet to spill over significantly to consumer spending, the dominant driver of U.S. economic growth. Instead, it has slowed the pace of expansion just enough to reverse last year's inflation surge. Still, the possibility of further deterioration in the sector this year remains a primary risk to economic growth -- particularly if it is accompanied by rising loan defaults or a broad tightening of credit standards.
So far, defaults and late payments have remained very low on prime mortgages, which are made to lower-risk borrowers and account for the bulk of home loans. But late payments have risen swiftly over the past year on subprime mortgages -- those made to risky borrowers with spotty credit histories -- and on "Alt-A" mortgages, a category between prime and subprime which includes many loans for which borrowers haven't documented their income. According to trade publication Inside Mortgage Finance, 13% of mortgages outstanding are subprime. (See Hot Topic on page A7.)
In November, payments were at least 60 days overdue on 12.9% of subprime loans packaged into mortgage securities, up from 8.1% a year earlier, according to First American LoanPerformance, a research firm in San Francisco. For Alt-A loans, the delinquency rate jumped to 2.1% in November from 1.1% a year earlier.
The upsurge in late payments and delinquencies has created turbulence among subprime lenders, and some large banks that bought subprime loans a couple of years ago have been pressuring subprime-mortgage lenders to buy them back. In its most recent survey of senior loan officers, released last week, the U.S. Federal Reserve found that some banks are getting more stringent to guard against this threat of defaults. About 18% of domestic banks reported that they had tightened credit standards on residential-mortgage loans over the past three months, the Fed said, adding that this was "the highest net fraction posted since the early 1990s."
But Fed officials and many other economists say the problems in subprime lending aren't severe enough at this point to significantly hamper economic growth. Doug Duncan, chief economist of the Mortgage Bankers Association, a Washington-based trade group, said only 6% of homeowners have subprime, adjustable-rate mortgages. Even if one-tenth of these end up in foreclosure -- the peak hit after the 2001 recession -- Mr. Duncan said that "it's hard to see how that can be a macroeconomic event."
Concern would rise if troubles spread further among lower-risk borrowers and lead to more defaults of Alt-A mortgages.
Another risk is that many subprime loans were made to buy houses in high-priced areas, which may be more vulnerable to price declines. Any widespread delinquencies on these loans could result in lenders seizing the underlying homes and dumping them on the market. That could exacerbate the industry's inventory problem, which has already put downward pressure on prices and forced builders to increase discounts and incentives.
Torn between yesterday's housing report's implications of slower growth and diminished inflationary pressure -- which makes additional interest-rate increases less likely -- stocks were virtually unchanged yesterday. The Dow Jones Industrial Average rose three points to close at 12768.
Pat Moroney, who heads the Phoenix division of Standard Pacific Homes, a California-based home builder, said sales-cancellation rates in Phoenix soared as high as 70% at times last year, and averaged 50% for the year as a whole. The company has been offering incentives to potential buyers between $15,000 and $100,000 to help move unsold homes in some markets, up from $5,000 to $10,000 in 2005.
"We worked pretty hard to get through our backlog" of unsold homes, Mr. Moroney said. "We've pushed a lot of cancellations through." In January, the cancellation rate fell to 32%, he said.
Given the stockpile of unsold homes, many industry officials and economists greeted the sharp drop in new-home construction last month as welcome news. "I think it's a positive indicator," said Ara K. Hovnanian, chief executive officer of Hovnanian Enterprises Inc., a large home builder based in Red Bank, N.J. He said the figures reflect a decrease in new-home orders over the past year and will help builders clear their inventories, paving the way for a gradual recovery to begin later this year.
Economists say the sooner builders cut back, the sooner a rebound can occur. "We look at this number, and it makes us a bit more optimistic about when we're going to see a recovery," said Todd Vencil, a housing analyst at BB&T Capital Markets in Richmond, Va.
Meanwhile, the industry's continuing supply adjustment is likely to continue to affect the broader economy. Dave Seiders, chief economist at the National Association of Home Builders, predicts that the cut in residential investment will shave one percentage point from the economy's inflation-adjusted growth rate in the first quarter, more than he was anticipating late last year.
"Now we're talking about a heavier hit," he said.
Job losses in the sector are also likely to mount. Zoltan Pozsar, an economist at Moody's Economy.com, said 170,000 housing-related jobs have been cut since April 2006. Luckily, the rest of the economy has added nearly 1.78 million jobs over that span, and the labor market continues to boost wages and provide support for increased consumer spending.
Separately, the Labor Department said wholesale prices fell 0.6% last month and was only 0.2% higher than a year ago, another indication of ebbing inflation concerns. And the University of Michigan said consumer sentiment slid to 93.3 in early February from 96.9 at the end of January.
To Fear of Wider Economic Impact
By CHRISTOPHER CONKEY and JAMES R. HAGERTY
February 17, 2007
A sharp drop-off in new-home construction is adding to concerns that the housing downturn's impact could linger well into this year and eventually seep into the wider economy.
Builders slashed construction of new homes last month to the lowest level in nearly a decade, a move that underscores the severity of the sector's slump and signals it will likely continue to be a drag on the economy at least through midyear. The slip in homebuilding last year subtracted more than 1 percentage point from inflation-adjusted economic growth over the second half of 2006.
Monthly home-construction readings are volatile and prone to weather-induced fluctuations, and last month's plunge may somewhat overstate the market weakness. But signs of deterioration in riskier segments of the home-mortgage market, along with stagnant or declining home prices in many parts of the country, provide additional reason for concern.
The plunge in new homebuilding activity in January -- down 14.3% from December and 37.8% from January 2006 levels -- could eventually hasten a recovery by reducing the overhang of unsold homes, however.
So far, the weakness in housing has yet to spill over significantly to consumer spending, the dominant driver of U.S. economic growth. Instead, it has slowed the pace of expansion just enough to reverse last year's inflation surge. Still, the possibility of further deterioration in the sector this year remains a primary risk to economic growth -- particularly if it is accompanied by rising loan defaults or a broad tightening of credit standards.
So far, defaults and late payments have remained very low on prime mortgages, which are made to lower-risk borrowers and account for the bulk of home loans. But late payments have risen swiftly over the past year on subprime mortgages -- those made to risky borrowers with spotty credit histories -- and on "Alt-A" mortgages, a category between prime and subprime which includes many loans for which borrowers haven't documented their income. According to trade publication Inside Mortgage Finance, 13% of mortgages outstanding are subprime. (See Hot Topic on page A7.)
In November, payments were at least 60 days overdue on 12.9% of subprime loans packaged into mortgage securities, up from 8.1% a year earlier, according to First American LoanPerformance, a research firm in San Francisco. For Alt-A loans, the delinquency rate jumped to 2.1% in November from 1.1% a year earlier.
The upsurge in late payments and delinquencies has created turbulence among subprime lenders, and some large banks that bought subprime loans a couple of years ago have been pressuring subprime-mortgage lenders to buy them back. In its most recent survey of senior loan officers, released last week, the U.S. Federal Reserve found that some banks are getting more stringent to guard against this threat of defaults. About 18% of domestic banks reported that they had tightened credit standards on residential-mortgage loans over the past three months, the Fed said, adding that this was "the highest net fraction posted since the early 1990s."
But Fed officials and many other economists say the problems in subprime lending aren't severe enough at this point to significantly hamper economic growth. Doug Duncan, chief economist of the Mortgage Bankers Association, a Washington-based trade group, said only 6% of homeowners have subprime, adjustable-rate mortgages. Even if one-tenth of these end up in foreclosure -- the peak hit after the 2001 recession -- Mr. Duncan said that "it's hard to see how that can be a macroeconomic event."
Concern would rise if troubles spread further among lower-risk borrowers and lead to more defaults of Alt-A mortgages.
Another risk is that many subprime loans were made to buy houses in high-priced areas, which may be more vulnerable to price declines. Any widespread delinquencies on these loans could result in lenders seizing the underlying homes and dumping them on the market. That could exacerbate the industry's inventory problem, which has already put downward pressure on prices and forced builders to increase discounts and incentives.
Torn between yesterday's housing report's implications of slower growth and diminished inflationary pressure -- which makes additional interest-rate increases less likely -- stocks were virtually unchanged yesterday. The Dow Jones Industrial Average rose three points to close at 12768.
Pat Moroney, who heads the Phoenix division of Standard Pacific Homes, a California-based home builder, said sales-cancellation rates in Phoenix soared as high as 70% at times last year, and averaged 50% for the year as a whole. The company has been offering incentives to potential buyers between $15,000 and $100,000 to help move unsold homes in some markets, up from $5,000 to $10,000 in 2005.
"We worked pretty hard to get through our backlog" of unsold homes, Mr. Moroney said. "We've pushed a lot of cancellations through." In January, the cancellation rate fell to 32%, he said.
Given the stockpile of unsold homes, many industry officials and economists greeted the sharp drop in new-home construction last month as welcome news. "I think it's a positive indicator," said Ara K. Hovnanian, chief executive officer of Hovnanian Enterprises Inc., a large home builder based in Red Bank, N.J. He said the figures reflect a decrease in new-home orders over the past year and will help builders clear their inventories, paving the way for a gradual recovery to begin later this year.
Economists say the sooner builders cut back, the sooner a rebound can occur. "We look at this number, and it makes us a bit more optimistic about when we're going to see a recovery," said Todd Vencil, a housing analyst at BB&T Capital Markets in Richmond, Va.
Meanwhile, the industry's continuing supply adjustment is likely to continue to affect the broader economy. Dave Seiders, chief economist at the National Association of Home Builders, predicts that the cut in residential investment will shave one percentage point from the economy's inflation-adjusted growth rate in the first quarter, more than he was anticipating late last year.
"Now we're talking about a heavier hit," he said.
Job losses in the sector are also likely to mount. Zoltan Pozsar, an economist at Moody's Economy.com, said 170,000 housing-related jobs have been cut since April 2006. Luckily, the rest of the economy has added nearly 1.78 million jobs over that span, and the labor market continues to boost wages and provide support for increased consumer spending.
Separately, the Labor Department said wholesale prices fell 0.6% last month and was only 0.2% higher than a year ago, another indication of ebbing inflation concerns. And the University of Michigan said consumer sentiment slid to 93.3 in early February from 96.9 at the end of January.
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