Housing-Starts Plunge Prompts
Question: Are We There Yet?

Economists had expected housing starts to decline in January, a natural retreat amid the cold weather following the fourth quarter's warm spell. But the 14.3% drop in starts to the lowest level in nearly 10 years was much sharper expected. The report prompted economists to peer into the housing slump and contemplate its elusive bottom. Some economists noted signs of stabilization despite what some referred to as the "noisy" headline number. Following are some economists' reactions.

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Much weaker than expected report. The payback we expected to emerge over the course of the first quarter as the artificial boost to activity over the course of the fourth quarter from the unusually warm weather was reversed appears to have come through right away in January ... Based on these results, we cut our forecast for residential investment in the first quarter and reduced our GDP forecast to +3.4% from +3.6%.

– David Greenlaw, Ted Wieseman, Morgan Stanley Research

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We didn't really believe the reported increase in December starts and we are equally inclined not to take too seriously the reported January plunge. The starts numbers are hugely volatile even when weather conditions are normal for the time of year, but that has not been the case in the past couple of months. The permits data are less affected by the weather, and the downtrend there seems to be over, at least for now. Another stable month in Feb would confirm the shift. Ultimately, this is more important than the noisy starts numbers, even though the latter appear more supportive of our medium-term bearish growth view.

– Ian Shepherdson, High Frequency Economics

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[T]his decline was aggravated by harsh winter weather. However, because of the shifting weather patterns, it may be better to average the last three months, which would be about 1.54 million. Sales of new homes appear to be stabilizing; with inventories of unsold new home still elevated, housing starts will stay weak but not necessarily continue to contract. Nevertheless, housing contribution to economic growth will be substantially negative again in the first quarter.

– Steven Wood, Insight Economics

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You can't blame this one entirely on the weather, and we continue to maintain the worst is NOT over for housing. ...Single family starts, and permits, reflect the lingering glut of unsold homes remaining on the market. Moreover, ... there is still a considerable amount of new supply still hitting the market...inventory problems are only going to intensify over the coming months. Adding to the mix is the fact that mortgage lenders have apparently seen the light and are tightening lending standards.

– Richard Moody, Mission Residential

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Although housing starts will probably remain weak in 2007 (permits in January were 29% below the year-ago level), as builders continue to scale back activity in order to keep a lid on supply, housing demand continues to show tentative signs of stabilization. The MBA purchase gauge in January remained around a historically high level of 400, while the NAHB housing market index in February rose by five points to 40, its highest level since last summer.

– Omair Sharif, RBS Greenwich Capital

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Anyone who wants to sugar-coat the housing industry's state of affairs [had] better look at this morning's housing-starts report. Construction of new single-family and multifamily properties plunged 14.3% to an annualized rate of 1.408 million units from 1.643 million units in December. The year-over-year drop was even more dramatic -- 38%. Not only was January's starts figure well below the forecast for 1.6 million, it is the WORST TO DATE for the down cycle in housing.

– Mike Larson, Weiss Research

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[T]he slowdown in housing will leave appliance and building supply manufacturers eager to entice retail customers with good deals. Moderate growth in consumer incomes and falling housing prices will force apparel retailers to price aggressively to attract customers. ...Prices for new and existing homes have moderated, not collapsed, ...Once completed, the housing adjustment should promote healthy growth and moderate inflation less dependent on consumer borrowing.

– Peter Morici, University of Maryland

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The weakness in January was in all the regions which had experienced the biggest boom in building. Only in the Northeast was there slightly more building in January. It was the area that participated least in the boom and where the contraction in the past year has been smallest. Home completions have fallen only 8% over the past year. The gap between this lagging indicator of activity and starts helps explain why construction jobs have not fallen commensurately with new starts.

– Brian Fabbri, BNP Paribas

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