Builders broke ground on fewer homes in February than a month earlier, and the trend is not likely to improve anytime soon, according to federal data released Wednesday.
Construction of single-family and multi-family homes fell to a seasonally adjusted annual rate of 479,000 in February, the lowest level since April 2009, the Commerce Department reported. That’s down 22.5 percent from January, the largest monthly plunge since 1984.
Meanwhile, fewer builders pulled permits in February, suggesting that construction is unlikely to pick up soon. Building permits were at a seasonally adjusted annual rate of 517,000, the lowest level since the government began tracking the numbers in 1960.
The results suggest that builders lack the incentive to break ground given the stiff competition they face from the excess supply of existing homes — particularly the deeply discounted foreclosures that are flooding the national housing market.
“Until the market works through the overhang, there’s no need to ramp up production,” said Michael Larson, an analyst at Weiss Research. “The February numbers underscore the fact that new-home builders are at a steep competitive disadvantage.”
The weakness was widespread geographically and among housing types.
The drop in construction was most severe among multi-family homes, which tumbled 46.1 percent from January to February. Housing starts for single-family homes fell 11.8 percent. Starts were down in every region, led by a 48.6 percent drop in the Midwest.
As for permits, which fell 8.2 percent in February, the decline was led by a 9.3 percent drop in single-family homes. Permits for multi-family homes were down 4.9 percent.
The numbers may be skewed by bad weather in some parts of the country.
“There was plenty of snow at the start of the month and the drop in starts was concentrated in the mid-west and northeast,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a note to clients.
A change in building codes that caused many builders to pull permits in late 2010 and start construction in January also may have distorted the February results, said Mark Vitner, a senior economist at Wells Fargo Securities.
The pickup in January’s building activity made that month’s seasonally adjusted numbers look better than they should have and made February’s numbers look worse, Vitner said. By contrast, the non-seasonally adjusted numbers show that housing starts in February were no worse than they were in December.
“It’s a little bit of a fluke, but I don’t want to take away from the fact that new home construction is going to be extremely depressed in the first half of the year,” Vitner said. “Most of the builders we talk to see little prospect for even a modest recovery until the second half of this year. There’s one exception and that’s among some builders in the close-in Washington, D.C., suburbs who saw a slight pick-up in sales in recent months.” Also, even though the swelled supply of existing homes for sale is at an unhealthy level, the number of new homes on the market is the lowest it has been in decades. That means that small changes in extraneous variables can lead to wide distortions.
This week, a survey by the National Association of Home Builders showed that builder confidence edged up this month. But the group also said that the excess supply of foreclosures, appraisals that are coming in below construction costs, and tough lending standards for buyers and builders continue to hamper the new-homes market.
“There are just too many uncertainties out there for most builders and buyers to comfortably move forward with a new-home project at this time,” David Crowe, the group’s chief economist, said Wednesday in a statement.