U.S. housing market sending mixed signals - Construction rises; Midwest still hurting

U.S. housing market sending mixed signals - Construction rises; Midwest still hurting
By William Sluis
Copyright © 2007, Chicago Tribune
Published March 21, 2007

The housing market might be only be treading water as spring begins, but at least it isn't vanishing in an undertow.

A government report Tuesday said construction jumped 9 percent in February, better than analysts were expecting. It offered evidence that while housing is a drag on the economy, it is in no imminent danger of sinking.

Locally, however, the news wasn't as good.

"This is the most important period of the year for new-home sales, and builders still report that activity is mediocre," said housing consultant Steve Hovany.

Sales are down about 20 percent from 2006, when they were lower by 20 percent from peak levels a year earlier, he said.

"There is quite a bit of traffic at sales centers, but buyers are wary," said Hovany of Strategy Planning Associates in Schaumburg.

Meanwhile, some builders are seeking to sell land, he said, and they are extremely reluctant to start new projects.

The Midwest and Northeast, hard-hit by snowstorms and subzero cold, saw construction fall last month. Housing starts were off by 14 percent in the nation's midsection, on top of a 16 percent decline in January. Construction was off nearly 30 percent along the East Coast.

Overall, housing starts in February rose to a seasonally adjusted annual rate of 1.525 million units, the Commerce Department said. Construction had fallen by 14.3 percent in January to the slowest pace in more than nine years.

Even with the better-than-expected rebound, activity remained 28.5 percent below the level of a year ago, underscoring housing's steep downturn.

"There are very high backlogs of both new and existing homes, indicating a lot of property remains for sale," said Chicago economist Paul Kasriel.

Builders "are walking away from options on land, and taking write-downs against earnings," said Kasriel, of Northern Trust Co.

For the economy, the decline in housing is worrisome because it means that homeowners can no longer use a residence as a piggy bank or as an ATM, he said.

"Instead of refilling the ATM, the home is draining money," Kasriel added.

A 2.5 percent drop in building permits in February was the 12th decline in the last 13 months.

Even so, "the rates of decline in both housing starts and permits have slowed sharply," said economist Ian Shepherdson of High Frequency Economics in Valhalla, N.Y.

But construction of single-family houses "still is falling rapidly, down at a 17.7 percent annualized rate in the three months to February, compared to the previous three months," he said.

Nationally, concerns about growing defaults on subprime mortgages have placed additional homes on the market, leading builders to halt projects and lay off workers.

Speculation that the housing slowdown will deepen has mounted in recent weeks amid rising delinquencies and foreclosures on subprime loans.

Some mortgage companies have tightened standards for borrowers, and the Federal Reserve, which is meeting Wednesday to weigh monetary policy, has warned lenders to be sure borrowers can repay debts.

Home builders, struggling to recover after more than a year of slumping sales, face a possibility that the surge in defaults on subprime mortgages will make other types of home loans harder to get.

"Builders are uncertain about the consequences of tightening mortgage lending standards for their home sales down the line, and some are already seeing effects of the subprime shakeout on current sales activity," said economist David Seiders of the National Association of Home Builders.

Recently, foreclosures begun on all types of home loans have risen to an all-time high.

Extreme weather in much of the country held back last month's construction activity, said economist Patrick Newport of Global Insight in Lexington, Mass.

"A major snowstorm hit the Midwest and Northeast on Feb. 14 and 15, shutting down businesses for two days in a month that has only 28 days," he said.

The effect was especially devastating for the Midwest, "the region with the highest fourth-quarter foreclosure rate," he said.

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wsluis@tribune.com