Housing starts unexpectedly plunge in October

Construction on new housing unexpectedly plummeted 10.6% in October to a seasonally adjusted annual rate of 529,000, the U.S. Commerce Department announced Wednesday, gouging a pothole on the housing sector's road to recovery. It was the lowest housing start level in six months.

A Bloomberg News economists survey had expected housing starts to total a 590,000 annualized rate in October. Housing starts totaled a revised 592,000 annual pace in September, and 587,000 annual pace in August. Housing starts hit a cycle-low 479,000 pace in April.

Further, although housing starts are still up 8% since January, analysts caution that any increases in housing sector activity stem from a very low point with depressed construction levels, following the nation's worst housing recession in more than a generation.

In October, starts of single-family homes fell 6.8% to a 476,000 annual rate, but multi-family units (five units or more) plummeted 33.3% to a 48,000 annual rate.

What's more, housing starts were down 30.7% in October as compared to the same month a year ago, with single-family homes declining about 11% and multi-family units nose-diving 78.1%.

Meanwhile, building permits declined 4% in October to a seasonally-adjusted annual rate of 552,000, with single-family building permits dipping 0.2% to a 451,000 rate. Apartment/condo permits plunged 17.9% to a 101,000 rate.

Economists follow the housing start statistic because of the large role residential real estate has played historically in the U.S. economy. Housing affects commerce in companion sectors, such as furniture, appliances, insurance, and landscaping, among others. Hence, a sustained increase in housing starts usually puts upward pressure on U.S. GDP.

Economists also caution that monthly housing start data contains a margin of error and revisions can be large. In addition, housing analysts underscore that it can take three to five months for a housing trend to form, and retrenchments are possible. When can investors and potential home buyers or sellers be confident that an upward housing trend does not represent a false reading? When housing starts, sales, and prices rise in unison with monthly job gains for the U.S. economy for several months.

Economic Analysis

This was a poor October housing start stat. While most sector analysts will caution that it's only one month, it's nevertheless fortuitous that Congressional lawmakers approved an extension of the $8,000 federal income tax credit for first-timer home buyers through April 30, 2010, for homes that close by June 30, 2010. Combined with the dip in the National Association of Home Builders index to 17 in November from 18 in October, the data indicates the U.S. economy still isn't strong enough to create self-sustaining housing sector growth, hence the tax credit extension is a prudent tonic.
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