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Homebuilders Face New Hurdles

Drywall
Drywall

Builders are on track to construct the fewest single family homes in history this year. Total housing starts in Julywere down 1.7 percent, month to month, which may not sound like a lot, but when you break the number down, you see the problem.

Single family starts were down 4.9 percent, while multifamily starts rose 6.3 percent. Rental demand continues to rise, as consumer confidence in homeownership was decimated yet again by the recent debt turmoil in the economy.

I am reporting these numbers from a construction site. Mid-Atlantic Builders of Rockville, Md., is putting up the last phase of a large single-family development out in Bowie, Md., which is about 15 minutes outside the D.C. Beltway. They are a midsized builder, about 40 to 50 homes a year, which is about a third of the business they did just five years ago.

They are now smaller, leaner, but surviving thanks to their location near D.C., where unemployment is low, relative to the rest of the country. Business was even starting to pick up last winter, according to executive vice president Stephen Paul.

"We started what we call the spring market in February. We started out very strong, we had a good February, March, even into April," he said. "What started to cause consumer confidence to wane was the escalation of gas prices, the debt issue with the government, and what's going on in Europe."

In other words: Confidence.

"We see people not sure what to do at this moment and a little unsure," adds Paul. "They want to buy, they are anxious to buy, they see the rates very attractive, the prices are very affordable, but they have held off, really starting in May, and through the summer it's been slow."

Paul is confident that things will pick up in the fall, but housing analysts aren't so sure.

"The market is continuing to adjust to a reduction in the national home ownership rate at the same time the supply of existing single-family homes remain excessive," writes Peter Boockvar at Miller Tabak.

And at IHS Global Insight, Patrick Newport says, "Pent-up demand for housing is building as young adults stay at home, and at some point will spark a major revival in housing activity. But it is becoming harder to see that soon, so we have therefore delayed the housing improvement in our forecast (In our August forecast, 2012 housing starts are now pegged at 690,000, instead of 840,000 [July forecast])."

Just before I read that, builder Paul told me of a new trend I'd heard of only anecdotally: "We're seeing more multigenerational families moving into our homes, so we're selling in-law suites with the regular part of the house, and the parents are moving in and actually helping pay, funding the mortgage, so that's helping with the affordability."

That's precisely why we are seeing a drop in household formation. Add that to the surge in renting that I blogged about Tuesday, and it's pretty clear why the nation's homebuilders are in for a long haul back to recovery.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick