Matt Krantz
USA Today
Home builders broke ground on 6% fewer homes in August to a more than three-year-low, the government reported Tuesday, stunning forecasters at how rapidly the housing boom has gone bust.
The slowdown, which curtailed the number of homes entering construction to a seasonally adjusted annual rate of 1.665 million, has come on faster than many experts expected. The consensus was for starts to fall just 1% to about 1.75 million.
“Anyone watching the market knew this was going to come,” says David Rosenberg, economist at Merrill Lynch. But, he says, it was the magnitude of the downturn that was surprising.
Wall Street apparently also was caught off guard at how quickly home building has cooled. Home-building stocks, already devastated this year, got whacked again. KB Home fell 89 cents to $45.27, Toll Bros. fell 74 cents to $27.42 and Pulte Homes fell 46 cents to $31.61. A basket of eight leading home builders has lost nearly 31%, on average, in 2006, while the benchmark Standard & Poor’s 500 index is up nearly 6%.
The question is why the slowdown has been much sharper than expected, and possible reasons include:
• Falling prices. Forecasts were too high because they didn’t account for the fact that prices are falling so rapidly in some markets that buyers are walking away from homes they’ve agreed to buy, says Maury Harris, U.S. economist for UBS Securities. That’s a staggering fact, because buyers often forfeit 5% deposits when walking away. Harris says buyers are able to find similar homes in similar neighborhoods, in some cases, for 15% less than the ones they’d agreed to buy. “You’re still 10% ahead,” he says.
• Builders’ early denial. Despite signs demand was peaking in June of 2005, builders trusted their strong backlog of orders and didn’t even imagine orders could be canceled, says Rosenberg. Home production wasn’t cut in a meaningful way until February, he says, causing them to do it viciously now. “It’s a classic case of the supply response being too late,” he says.
• Builders’ delayed reaction. Initially, home builders thought they could dampen the downturn by throwing in fancy countertops or providing discounts, says Brian Bethune, economist at Global Insight. Now, they’re “grabbing the bull by the horns and adjusting the rate of production,” he says.
Experts differ on how bad the housing downturn will get before it heals. The fact that housing starts are being slashed so much will shorten the recovery period, Bethune says. “Short-term pain may avoid a more significant adjustment down the road,” he says.
But others see this latest disappointment as just the beginning. Rosenberg characterizes the ongoing home-building “recession” as only about halfway done. “We’re not even past the fourth or fifth innings,” he says.