U.S. News

Housing Report Sparks Optimism, But Worries Remain

Diana Olick

Housing starts in February jumped 9% from a month ago but were still down 28.5% from a year ago, the Commerce Department reported. The February increase was the biggest since January of last year and followed a 14% drop the previous month.

Meanwhile, building permits, an indicator of future building, fell 2.5% from January and were down 28.6% from a year ago. The drop in permits shows builders are being cautious, with fewer and fewer “spec” homes in the pipeline.

The unexpected strength in the latest housing data comes amid anxiety over the subprime mortgage market, calls for tighter lending standards, continued high inventory of unsold homes and falling home prices from coast to coast.

“We have seen over the last several months, the trend has been down in starts and people have been worried more about getting rid of existing inventory than building new inventory,” said Greg Heym, chief economist for Halstead Properties. “Obviously they’re optimistic about the future and they’re thinking several months down the road, not necessarily looking at what’s happening now.”

Housing Starts

While the starts number sounds promising for the spring market, some are calling it an aberration, possibly due to weather or to the steep drop in January starts. The fallout from the recent subprime implosion may not be showing up yet, as purchasers today may have secured financing several months ago.

“It’s not that there aren’t subprime woes out there--there are to be sure--and I think they’ll get worse,” said Richard Dekaser, chief economist at National City. “It’s just that we have the more important fundamentals putting a floor under the market, and I think that will prevent this from becoming another leg down.”

Others aren't quite so sure. Todd Vencil of BB&T Capital Markets said it’s still too soon to gauge the effects of the subprime problems on lending and home prices. “We were muddling through trying to find a bottom during ’07 already," he said. "I think this may slow that process down a bit--I don’t think we have the information yet to say that it’s going to derail it though.”

Chicago area builder John Carroll, President and CEO of Kirk Homes, said he’s seeing good traffic through his higher end development in Bolingbrook. But he said he’s also hearing a lot of concerns about the market, price sustainability and mortgage rates as well as mortgage availability.

“We’re having to do a lot of reassuring with our customers, potential buyers who aren’t even in the subprime area,” he said.

Inventories of unsold homes are coming down off their peak last fall, prices are coming down on a nationwide average, and that could offset some of the anxiety over the subprimes.

“Inventories are certainly much higher on month supply basis, they’re much higher on an absolute basis as well," said Vencil of BB&T. "They appear to have stabilized--we wouldn’t be surprised to see them creep up a bit as we head into the spring season.”