Tuesday, May 19, 2009

US Housing Starts Plunge to Record Low

US housing starts plunge to record low

By Alan Rappeport in New York
May 19 2009 14:58

New US residential building fell to the lowest level since 1959 last month, signalling that the stricken housing market could have further to fall.

Housing starts fell for the ninth time in 10 months, dropping by 12.8 per cent to an adjusted annual rate of construction of 458,000, commerce department figures showed on Tuesday. The decline dashed analysts’ expectations of an increase in new construction, but many took this as good news because the overhang of housing inventory needs to be slashed for a recovery to occur.

The monthly fall was entirely due to a steep drop in multi-family home construction, which plummeted by 46.1 per cent. Single-family housing starts actually rose by 2.8 per cent in April, suggesting a bottoming out in that segment of the market.

“In the multi-family segment of the market, the recession, specifically the battered labour market, has taken a clear toll on the rate of household formation, leading to diminished demand,” said Richard Moody, chief economist at Forward Capital.

On the year, housing starts have plunged by 54.2 per cent, as builders have been wary of breaking new ground amid plunging real estate prices. Last month’s drop followed a fall in new construction in March, when revised figures showed housing starts declined by 8.5 per cent. During the height of the construction boom, monthly housing starts peaked at 2.27m in January 2006.

“A weak starts number is good for the economy because it stabilises real estate prices,” said Mike Englund, an economist at Action Economics.

Home prices have seen record drops in the last year and remain nearly 30 per cent below their peak in July 2006. The National Association of Realtors said last week that the median price of an existing home fell by 13.8 per cent to $169,000 in the first quarter of this year from the same period in 2008. Foreclosures and distressed sales made up nearly half of all transactions in the first quarter and continue to rise as job cuts continue to spread.

Joshua Shapiro, chief US economist at MFR, said that the market for cheaper, single-family homes is beginning to bottom, but that the higher end of the housing sector remains bloated.

“We continue to believe that the overall median price of homes is going to continue to decline for some time,” Mr Shapiro said. “The bottom end of the market, however, will probably continue to show signs of life as long as first-time buyers can get the financing they need.”

Building permits, which signal future construction, fell by 3.3 per cent in April to 494,000, itself a record low. However, permits for single-family homes climbed by 3.6 per cent. On the year, building permits are down by 50.2 per cent.

The results on Tuesday came after a hopeful survey the day before that showed US homebuilder confidence rose to an eight-month high in May and has doubled since falling to a record low at the beginning of the year as buyers responded to new incentives to break ground.

The National Association of Home Builders’ index of homebuilder sentiment rose from 14 to 16 this month, in line with economists’ expectations. The figure remains 78 per cent below the peak of hopefulness reached in June 2005 when the index rose to 72. A reading of more than 50 indicates “good” conditions.

Ian Sheperdson, chief US economist at High Frequency Economics, notes that in spite of the recent signs of life, homebuilders are unlikely to ramp up production any time soon because the overhang of inventory remains so high. Moreover, the market for existing homes remains severely depressed because of widespread foreclosures.

Copyright The Financial Times Limited 2009

Housing data dim mood on Wall Street

By Kiran Stacey in New York
May 19 2009 14:02

US stocks were set to struggle on Tuesday morning after a surprisingly low number of housing starts in April eroded confidence stemming from Home Depot results which suggested that the housing market could be nearing a bottom.

The largest US home improvement store beat analysts’ expectations with its first quarter profits, following similarly positive results from its smaller rival Lowe’s on Monday.

Althougth this gave support to the broader market, Home Depot’s shares fell in pre-market trade, giving back some of the impressive gains made on the back of Lowe’s’ results during the previous session. Less than an hour before the bell, they were 3.4 per cent down at $25.14.

There was also some relief for upmarket retailer Saks, whose shares jumped 17.2 per cent to $4.78 as it reported a narrower loss than expected after cutting costs and inventories to cope with the slump in consumer demand. The company warned sales would continue to decline for the rest of the year, and said it would continue to cut costs to compensate.

But futures fell back after figures showed that builders began work on 458,000 new homes during April, a record low, and far lower than the market was expecting.

Less than an hour before the open, futures for the benchmark S&P 500 index were up 2 points to 907.3, while those for the Dow Jones Industrial Average gave up 2 points to 8,468 and those for the Nasdaq Composite index dropped 4.8 points to 1,383.8. All were lower than fair-value levels, which take into account dividends, interest rates and time to expiration on the contract.

Banks had gained in early pre-market trade after it was reported that Goldman Sachs, JPMorgan and Morgan Stanley were ready to pay back government bail-out money. Reports suggested the three banks had filed to be among the first batch of financial companies given permission to repay money from the Troubled Asset Relief Programme (Tarp).

They fell back after the housing data were announced. Goldman lost 0.2 per cent to $142.85 before the bell, while JPMorgan dropped 0.6 per cent to $37.05 and Morgan Stanley fell 0.9 per cent to $28.03.

“The desire of Goldman Sachs, Morgan Stanley, and JPMorgan to pay back Tarp is leading the trade to think the financial crisis is behind,” wrote Nick Kalivas, an analyst at MF Global.

Investors also welcomed news from American Express, which said it would cut 6 per cent of its workforce - a total of 4,000 jobs - in an effort to save $800m over the rest of the year. The credit card company is also believed to be one of those likely to receive first approval to repay Tarp money. But it also fell on the economic pessimism, losing 0.7 per cent to $25.95.

Meanwhile, Medtronic, the largest US medical device maker by market value, slipped 2.2 per cent to $33.20 after reporting disappointing profits on the back of acquisitions and legal charges. The company also plans to eliminate 1,500 to 1,800 jobs.

MGM Mirage, the casino operator that is in the middle of a restructuring plan, jumped 14 per cent on Monday after JPMorgan said the company was not likely to enter bankruptcy within the next two years.

It continued to rise in the pre-market session on Tuesday after it amended the terms of its lending facilities with a consortium of banks, including Bank of America. It was also helped by an upgrade from Moody’s, which raised its ratings on the company from CCC to CCC+, citing the company’s recent successful raising of $2.5bn in new capital.

The shares climbed 2.4 per cent to $8.95.

European stocks were higher ahead of the open on Wall Street. The FTSE Eurofirst 300 index was 1.3 per cent up at 871.57 points. Asian equity markets closed mainly ahead, as the FTSE Asia-Pacific index gained 2.4 per cent to 188.07 points.

Bond yields were mixed. The yield on the two-year Treasury note fell 1 basis point to 0.899 per cent while that on the 10-year note rose 1bp to 3.239 per cent.

The dollar was weaker against major currencies early in New York, losing 1.5 per cent against the pound to $1.55.

Gold was trading $0.60 higher at $923.75 per troy ounce.

Oil prices were up for a second straight morning in New York. US crude prices were $0.81 higher at $59.84 a barrel.

Copyright The Financial Times Limited 2009

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