Wednesday, December 26, 2007

Great Article about Real Estate

WASHINGTON — Construction of single-family homes in October skidded to the lowest level in 16 years although the slide was cushioned somewhat by a rebound in apartment building.
The Commerce Department reported Tuesday that total housing construction rose by 3 percent in October to a seasonally adjusted annual rate of 1.229 million units. But all the strength occurred in a hefty rebound in apartment construction, which is extremely volatile.
The bigger single-family sector actually fell by 7.3 percent to an annual rate of 884,000 units, the slowest pace since October 1991, when housing was going through another steep downturn. In another worrisome sign, applications for building permits fell for a fifth straight month.
The current housing slump is expected to worsen further before starting to rebound in the middle of next year. The credit crunch that hit with force in August has caused financial institutions to tighten up on their lending standards, making it harder for prospective borrowers to get home loans.
In addition, some 2 million borrowers who took out subprime loans during the peak of the five-year housing boom are now seeing low introductory rates reset to much higher levels, adding $250 to $300 to the typical monthly payment. The concern is that this will fuel a tidal wave of defaults over the next two years, dumping even more unsold homes onto the market.
On Wall Street, investors discounted the housing news to hunt for bargains, pushing stock prices higher following steep losses in trading on Monday.
Analysts predicted that construction activity will slump even further in coming months as builders strive to reduce their inventory of unsold homes. They noted that applications for new building permits, considered a good barometer of future activity, fell 6.6 percent to an annual rate of 1.178 million units.
“This is just what the doctor ordered,” said David Seiders, chief economist of the National Association of Home Builders. “Given weak demand and the large overhang of inventory, you just have to cut back on production.”
The association’s monthly survey of builder sentiment remained at a record low in early November. Seiders said that reflected the further tightening in mortgage lending standards that has been occurring since financial markets were roiled this summer by rising defaults on subprime mortgages — loans offered to people with weak credit histories.
Seiders predicted construction activity will start to rebound by the second half of next year, once sales stabilize. But he said for this forecast to come true, he expects the Federal Reserve — which has already cut interest rates twice since September — will have to cut rates further to make sure the overall economy is not pulled into recession from the deepening problems in housing, the credit crunch and surging oil prices.
“For housing to come back, the overall economy has to perform pretty well and for that to happen, it will take a couple more rate cuts by the Fed,” Seiders said.
Many economists believe that overall economic growth — which roared ahead at an annual rate of 3.9 percent in the July-September quarter — will skid to 1 percent or less in the current quarter and the first three months of next year, raising the threat that some unexpected shock could put the country into a full-blown downturn.
Other analysts believe the Fed will cut rates further despite their recent comments about risks being balanced between weak growth and higher inflation.
Joel Naroff, chief economist at Naroff Economic Advisors, said the Fed may well remain on hold at its next meeting on Dec. 11, but he predicted overall economic weakness will prompt the Fed to push the federal funds rate, currently at 4.5 percent, well below 4 percent next year.
In contrast to the 7.3 percent drop in single-family construction, the government reported that multifamily activity, which represents less than one-third of total construction, surged by 44.4 percent in October but that gain came after a 35.9 percent plunge in September in what is a very volatile series.
The rebound in overall construction in October reflected gains in all regions of the country except the South, where building activity fell by 4.6 percent. Construction rose by 21.1 percent in the Midwest, 8.5 percent in the Northeast and 5.8 percent in the West.