New-Home Slowdown Is Good News, Even To NAHB Chief Economist

The pace of new-home construction in November dropped to the lowest level in 14 years. And that's good news, even to David Seirs, Chief Economist for the National Association of Home Builders (NAHB). David Seirs says he's somewhat pleased because builders cannot reduce their inventories of unsold homes unless they cut production, particularly in light of weak demand and rising competition from existing home sellers.

"The builders are behaving appropriately at this point," Seiders said. "I would have liked to see the production decline start earlier than it did. But since the beginning of 2007, production has been falling rapidly."

The pace of housing starts fell 3.7% in November from a month earlier, to a seasonally adjusted annual rate of 1.187 million, and it dropped 24% from November, 2006. Building permits, an indicator of future home construction, fell 24.6% from November, 2006, to an annual rate of 1.152 million.

With buyer activity down and their stocks getting crushed, many builders are "freezing" projects. They are doing everything they can to unload current inventory before continuing on existing projects or beginning new ones. In some cases, they are literally walking away from projects and leaving them to collect dust until existing ones sell out.

Though this tactic can be an eye sore to locals, it's working. In October, the supply of new homes dropped to 8.5 months down from 9 months in September. The lower the supply, the better it is for prices.

And the better it is for sellers and home owners in general. Much like builders helping property values go through the roof by increasing base prices weekly during the boom, builders drag property values down by decreasing base prices and/or offering higher incentives during the bust. Once builders gain some stability and are carrying less inventory, they will start back up on their projects and base prices and incentives will start to plateau. This will directly effect the property values of resales/existing homes and the real estate market in general.

Source: BusinessWeek

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