Housing starts: Don't panic over October's plunge

House starts plunge, but here are three reasons why you shouldn't panic.

Joshua Lott/Reuters/File
Workers construct a house by developer KB Home in Gilbert, Ariz. Housing starts plunged 10.6 percent last month to reach their lowest level in six months, the Commerce Department reported Nov. 18.

The unexpected decline in housing starts is a stark reminder that America's housing recovery is going to be slow. But there's no cause for panic.

The number of new homes that builders began constructing last month fell 10.6 percent from September's level to their lowest level in six months, the Commerce Department reported (.pdf) Wednesday. Analysts had expected a modest increase to an annual rate of about 600,000 starts seasonally adjusted; instead, it fell to 529,000.

"These figures can be pretty volatile from month to month, so it may just be a blip," writes Paul Ashworth, an economist at Capital Economics, in an analysis. "Nevertheless, taken at face value it suggests homebuilders are still uncertain about the sustainability of the rebound in home sales."

Indeed, builder confidence remains at very low levels, the National Association of Home Builders reported Tuesday.

But the outlook for homebuilding may not be as quite bleak as it appears. For one thing, homebuilders last month weren't sure that the expiring home-buyer tax credit would be extended. While the tax credit wouldn't directly affect their plans, it could help boost the real estate market in general and thus buoy prospects of selling new homes.

For another, single-family home construction is holding up far better than multifamily home construction, points out Jim Diffley, an economist at IHS Global insight. Building permits for single-family homes - a precursor to housing starts - only fell 0.2 percent from September to October, he points out.

Third, as the inventory of existing homes for sale returns to normal, demand for new homes should pick up. Next year's totals will still be below 2008's depressed figure, but 2011 should see a return to a more normal 1.3 million housing starts for the year, Mr. Diffley says.

"We don't think [Wednesday's report] is more than a temporary setback," he adds. "Builders are sitting on land. They're waiting for activity to get going."
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