New home construction in Midwest on the rise; Construction outpacing sales

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By: Dennis Norman

This morning the US Census Bureau and US Department of Housing and Urban Development (HUD) issued their report on New Residential Construction for August 2009 showing a slight decrease in new home construction activity from July in the US, but an increase in new home construction activity here in the Midwest.

The report shows the following for the Midwest Region:

  • Building permits issued for single-family residences in August were at an annual rate of 80,000 which is 3.9 percent above the July rate of 77,000 and 10.1 percent below a year ago.
  • Housing starts for single-family residences in August were at an annual rate of 90,000 which is 7.1% above the July rate of 84,000 and 20.4 percent below a year ago.
  • Single-family homes completed in August were at a rate of 93,000 which is a whopping 19.2 percent increase from the July rate of 78,000 and 27.3 percent below a year ago.

Something to remember is all the numbers above are “seasonally adjusted” annual rates and the year over year comparisons are just comparing the numbers for August 2009 versus August 2008. Another way I like to look at where things stand is to simply look at the year to date data; actual numbers, not seasonally adjusted, compared to last years ytd numbers at this same time. I think this may give a little better comparison so those numbers are below for the Midwest Region:

  • Through August 2009 there have been 48,600 permits issued for new homes compared with 69,500 this time last year for a decline of over 30 percent.
  • Through August 2009 there have been 49,900 new homes started compared with 74,700 this time last year for a decline of 33.2 percent.
  • There have been 54,700 new homes completed through August 2009, compared with 90,800 this time last year for a decline of 39.8 percent.

An increase in new home construction sounds good on the surface, and I am really anxious to see some relief for builders and those working in the construction trades, however, I have concerns because it appears more new homes may be being built then there is a market for.  Remember what helped get us in this mess?

The last new home sales numbers for the Midwest Region that were published (July) showed new home sales at a seasonally adjusted annual rate of 61,000 homes.  When reviewing the numbers above it is clear the rate at which new homes are being permitted and built is considerably higher than the rate they are being sold at.

Another concern I have has to do with the fact that I believe the new home sales we have seen over the past few months have been stimulated by two things that will leave the market at some point: tax credits and below-cost prices.

The first-time buyer tax credit has definitely contributed to sales, in fact from most agents I speak with they tell me the first time buyer market is practically the only market at this point. While Congress may extend the credit, at some point it will end, and unless we are truly in a recovery by then I think it could negatively impact new home sales.

The second issue, below-cost prices, is potentially a bigger issue. Because of the amount of new home inventory that was out there when the market tanked, and an awareness by banks that they would do better to allow builders to sell the homes at whatever prices the market would bear and release the house in exchange for the proceeds from the sale, there have been many homes sold at a price that is significantly below their construction cost. In fact, my guess is this would be true in over half the sales of new inventory homes. This is something that definitely will not be repeated, at least not intentionally. Going forward these “deals” are going to dry up and this incentive will be gone which I feel is going to throw cold water on new home sales until, again, we see a real recovery.

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