Is New Construction Overbuilt Again Already?

Housing starts are up again, or so the U.S. Commerce Dept would have us believe.

But construction costs are starting to rise again too and that little foreclosure problem hasn't exactly gone away.

That's why the National Association of Home Builders is one of the biggest proponents of extending the first-time buyer tax credit that's due to expire at the end of November.

The NAHB's position is fairly clear: extend the tax credit or we'll stop building again, and take the construction and retail businesses with us.

While August's headline number for new construction was fairly strong at 598,000, this was mainly due to apartments and multi-family construction.

The single-family starts declined 3 percent from July
, after five consecutive months of increases.

At the same time, construction costs are starting to rise again, according to the most recent production price index.

"With the $8,000 first-time home buyer tax credit set to expire at the end of November, the window is now basically closed for being able to start a new home that can be completed in time for purchasers to take advantage of that," said Joe Robson, Chairman of the NAHB and a home builder from Tulsa, Okla. "Builders are therefore pulling back on new construction at this time. Clearly Congress must act now to extend the tax credit if we are to keep the market moving toward a recovery."

They've even started running ads (shown above.)

The relative strength in new construction has also been fairly regional. New construction was up 23.8 percent in the Northeast, while it was flat or down in the West, Midwest and South.

KB Homes and Toll Brothers have only recently returned to the Washington, D.C., area, which has one of the lowest unemployment rates in the country.

Builders are also keeping their inventories lean.

According to Reuters: "Overall homes still under construction fell 2.8% to a record low 595,000 units. The number of homes completed in the month fell 5.5% to a new record low 760,000 units."

At the same time, foreclosures were at a record high in July, and only slightly better in August.

According to the Wall Street Journal, the new-home supply is currently at 7.5 months, down from a year at the height of the downturn. A balanced market is six months, so builders may feel they are at a tipping point where they are going to be overbuilt next spring if Congress doesn't act now.

It's unclear whether Congress will extend the first time buyer credit or modify it, but with the looming battle over health care, carbon emissions and financial reform, it may not be a priority in the near term.

But it probably needs to be, one way or the other.
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