New-Home Construction Drops Most Since 1980

U.S. home construction last year plummeted at a rate not seen since 1980, according to government figures released yesterday, one more indication of the depth of the building industry's problems.

"When inventory is building up, when prices are falling and sales are falling, it's pretty difficult to identify the bottom," said Charles McMillion, chief economist at MBG Information Services in the District. "It shows declines, if anything, are accelerating."

The Commerce Department reported that construction on 1.35 million homes began in 2007, down 24.8 percent from 2006. In December, the government said, housing starts were at a seasonally adjusted annual rate of 1 million, a 14.2 percent drop from November and a 38.2 percent drop from December 2006.

Those figures gave little reason for builders to be optimistic, at least in the short term, in an environment in which recession is frequently mentioned, credit is tight, foreclosures are high and consumer confidence is sinking along with home prices.

In the past year, many large, publicly traded builders have reported staggering losses and have sold land and slashed home prices to dump inventory and stay solvent. On Wednesday, Eagle Crest Homes of Manassas, a small private builder, became the latest company to stumble in the troubled climate, filing for Chapter 7 liquidation.

However, analysts said yesterday's report shows that builders are responding to the soft market by cutting back on new construction until they reduce inventory. The Commerce Department had reported that it would take 9.3 months at the November sales pace to dispose of existing inventory of new homes. Six months or less is considered healthy.

"Clearly, builders got caught with too many homes," said Michael Larson, a housing analyst with the Weiss Group in Jupiter, Fla. "Belatedly, builders realized they need to cut back on construction to reflect the fact that demand had fallen."

Larson, like many other analysts, is predicting a turnaround in the industry in 2009. Others, particularly those in the real estate industry, see recovery late this year. And Daniel H. Mudd, president and chief executive of Fannie Mae, the large District mortgage firm, said this month that he thought the housing market would remain weak through 2009 and possibly gain modestly in 2010.

Yesterday's report contained another sign of continuing weakness. Building permits, an indicator of future construction, dropped 8.1 percent in December compared with November, and 34.4 percent compared with December 2006. The drop in permits from December 2006 to 2007 was the greatest since 1991, according to the Commerce Department.

However, David Seiders, chief economist for the National Association of Home Builders, said the drop in home starts in December over November was largely due to a falloff of about 40 percent in starts of multifamily buildings over that period. In October, multifamily starts were up 62 percent from the previous month, an indication of the volatility of those figures.

Starts of single-family homes, which account for about 80 percent of home starts, fell by a modest 2.9 percent, he said. "I think, once you subtract the multifamily category, it's not nearly as serious a decline."

Seiders said he hopes to see the government, including the Federal Reserve, take steps to help the industry.

He expressed more optimism than many other economists, saying he expects to see a turnaround in the building industry in the second half of 2008.

"That does assume the U.S. economy does in fact stay out of a recession, which seems to be the big topic of the day," he said.