Housing Starts Dropped Precipitously in June, Commerce Department Says

Economists blame inventory build-up, job market weakness, end of federal tax credit

New home and apartment construction statistics for June showed a precipitous drop in housing starts, which were 5.0% below the revised estimate for May and 5.8% below the June 2009 rate, the U.S. Commerce Department reported Tuesday, July 20.

Housing starts for June came in at 549,000 versus the revised May estimate of 578,000, according to the new residential construction report. A sizable decline in the construction of apartment buildings was largely responsible for the drop in starts. The June rate for buildings with five units or more was 88,000, down 19% from May's rate of 109,000. Single-family home starts, on the other hand, were at a rate of 454,000, only 0.7% below the revised May figure of 457,000.

Economists, who in a Thomson Reuters poll had expected that construction would fall to a rate of 580,000, blamed the dropoff on the weak job market, competition from foreclosed properties, and the end of the federal tax credit for first-time home buyers.

"The $8,000 tax credit-induced pick-up in existing and new home sales had created the perception that the housing sector might be turning the corner. That impression was based on the blurring of the distinction between starts and sales," wrote Anthony Karydakis, adjunct professor of economics at the Stern School of Business at New York University in his blog, An Economist's Corner.

"The strengthening in the demand for purchases of homes since last fall mostly led to a decline in the previously massive inventory of both new and existing homes but not to a meaningful pick-up in construction," Karydakis explained. "For housing starts to embark on an even moderate upswing from their depressed levels, it would require a reasonable degree of confidence by the construction industry that the stronger demand for housing is here to stay. We are not at that point yet."

On a more positive note, the report's building permits figure of 586,000 was 2.1% higher than the revised May rate of 574,000.

But Doug Roberts, chief investment strategist for Channel Capital Research in Shrewsbury, New Jersey, was skeptical about permits, saying that just because real estate developers apply for them doesn't mean they will actually complete building.

"There has been an overcapacity problem with real estate, and now the government incentive has gone away," Roberts said. "What people were banking on up until now was that this recession was similar to 2001-2. But priming the pump with the government stimulus is the primary driver. We're not seeing the huge V-shaped jump in the economy that we saw with previous recessions. It bounces and then goes back down."

Read a story about the July home builders' confidence index from the archives of InvestmentAdvisor.com.

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