Housing Starts Fall in May

Via Bloomberg:

"Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 percent from the prior month, the Commerce Department said today in Washington. Building permits increased 3 percent to 1.501 million."

"The drop in starts was led by a 20 percent slump in the West. Construction also fell 1.6 percent in the South. Starts rose 16 percent in both the Northeast and Midwest."

On the heels of the latest decline in the builder's confidence index, we have more evidence to support the pessimistic mood.

"'Builders are really worried now, not only by the credit tightening in the mortgage market, but now all of a sudden by an increase in the fundamental mortgages as well,' David Seiders, chief economist at the National Association of Homebuilders said in an interview yesterday."

"'Without a doubt, things have slowed since about March,' said Ara Hovnanian, the builder's chief executive officer in an interview yesterday. 'There is not a recovery that is about to happen.'"

There are no truer words than "there is not a recovery that is about to happen". The housing market is highly illiquid; thus, price corrections take years. I don't anticipate any semblance of a recovery until at least May/June of '08, and I wouldn't be surprised if the downturn stretches into 2009. And there will be more casualties. Steven Church investigates:

"'The weakest publicly held builders are staying out of bankruptcy by relying on the profit they made when sales boomed, and on the public debt they sold in those years', said Ronald Greenspan".

"'The value of shareholder equity for some companies equals or exceeds the value of the undeveloped land that the companies have under contract', Greenspan said. 'As the housing downturn continues, that land will fall in value'".

Only time will tell which companies will be hit the hardest. StreetTracks homebuilder index (XHB) will be an interesting fund to watch. Currently, the fund is priced at $32.69. I believe it will lose at least 25 percent of it's value by the end of the year winding up in the $20 - $24 range.

Over the coming days, I'll be researching the publicly-traded home builders and will report what I find.