Housing posts surprising rebound in April

May 16, 2008 5:40:37 PM PDT
Construction of new homes increased by the biggest percentage in more than two years in April, a rare spot of good news amid the worst downturn in housing in more than two decades. Analysts, however, played down the increase, noting that all the strength came from the volatile apartment sector. They said the painful housing slump is far from over as a record flood of foreclosures continues to add to the sizable stockpile of unsold homes.

The Commerce Department reported Friday that housing construction rose by 8.2 percent in April to a seasonally adjusted annual rate of 1.03 million units. While apartment construction rose by 36 percent, building in the much larger single-family sector of the market fell by 1.7 percent, the 12th consecutive monthly decline, pushing single-family activity down to a 16-year low.

"It is definitely too early to uncork the champagne on the long and winding road to more healthy housing-market conditions," said Brian Bethune, an economist at Global Insight. He said he did not expect housing activity to stabilize until the end of this year.

Len Blum, managing director of investment bank Westwood Capital, said the slump in housing will run for another year because of a number of problems, from banks tightening up on lending standards to the reluctance of many people to commit to a home purchase at a time when home prices are still falling.

"I think estimates that we are near the bottom of the housing correction will prove to be overly optimistic," he said. "We have had a housing bubble and it will take some time to deflate."

The prolonged two-year slump in housing is occurring after a five-year boom which pushed sales and home prices up to record levels. The correction has proven to be a serious drag on the overall economy, raising worries that the country could be in danger of falling into a recession.

A second report Friday showed that consumer confidence, as measured by a University of Michigan/Reuters survey, fell to a 28-year low of 59.5 in a preliminary reading for May, down from 62.6 in April. The drop was blamed in part on rising concerns about higher gas and food prices.

Concerns about falling consumer confidence and another spike in oil prices, to a new trading record of $127.82 a barrel, dampened investors' moods on Friday. The Dow Jones industrial average fell 5.86 points to close at 12,986.80.

Applications for building permits, considered a good sign of future activity, recorded an increase in April, rising by 4.9 percent to 978,000 units. It was the first gain in permits in five months but it still left permits 20 percent below where they were a year ago.

Economists said housing construction will remain under pressure until builders have more success in reducing a huge backlog of unsold homes, a challenge amid the current economic weakness.

"The demand for new homes still is quite weak, the overhang of vacant housing units is at record proportions, consumer sentiment continues to fall and the economy has been losing jobs since the end of last year," said David Seiders, chief economist at the National Association of Home Builders.

He said the economic fundamentals point to continued weakness in the single-family market for the rest of this year.

The troubles in housing sparked a severe credit crisis that erupted last August as major financial institutions began reporting multibillion-dollar losses on investments in securities backed by subprime mortgages, loans made to borrowers with weak credit histories.

Treasury Secretary Henry Paulson said Friday that he believed financial markets are "considerably calmer" now than they were in March, when the credit crisis claimed its biggest victim with the near-collapse of Bear Stearns, the nation's fifth largest investment bank. He predicted that the 130 million stimulus payments being made now to taxpayers will help overcome all the other problems holding the economy back.

"The fiscal stimulus will provide support to the economy as we weather the housing correction, capital markets turmoil and higher energy and food prices," he told an audience of business executives in Washington.

The Treasury Department reported that over the past three weeks, the government has made 45.5 million payments totaling $40.8 billion. Paulson said Friday that the aim is to have nearly $100 billion distributed to 130 million households by the middle of July.

The housing report showed that construction activity was up in most regions of the country in April, rising by 24.4 percent in the Midwest, 18.5 percent in the West and 3.6 percent in the South. However, construction fell by 12.7 percent in the Northeast.

Even with the improvement in April, housing construction nationwide was 30.6 percent below the level of activity a year ago.