Friday, April 07, 2006

Housing Surge Could Be a Lot of Hot Air

Warm weather helped the pace of home building to soar to the highest reported level in nearly 33 years in January, according to a government report Thursday that showed a real estate market that continues to top expectations.

But a big part of the blow out number was the government's seasonal adjustments, which in this case pumped up a solid number of housing starts due to expectations of cold weather in January.

Instead, the month was the warmest January on record in the United States. That prompted many builders to start work unexpectedly early, resulting in the exceptionally strong reported number.

But even the raw, non-seasonally adjusted number showed the best January for housing starts on record since the Census Bureau started keeping records in 1959.

"The outsized gain in housing starts was influenced by the same variable dominating most of the other headline stats like the retail sales and industrial production, namely weather," said Anthony Chan, chief economist for JPMorgan Private Client Services. "Everyone knows that housing starts is a volatile number that generally reports wide swings."

The Census Bureau reported that housing starts reached a seasonally adjusted annual pace of 2.28 million homes in January, the highest rate since March 1973, compared to a rate of just under two million homes in December. Economists surveyed by forecast that housing starts would come in at an annual rate of 2.02 million in the month.

But looking at the non-seasonally adjusted, non-annualized number report by the bureau, January starts were actually below the level seen in nine of the previous 10 months, even though they were up 11 percent from the raw number of starts in December.
Good ... for January

"It's a very good number for January," said Phillip Neuhart, economist for Wachovia. "But should we get carried away with the seasonally adjusted number? No. We still expect a slowdown in 2006, no question about it."

But the report also shows some strength that can't be explained away with weather. Statistics from the South, which accounts for nearly half the new home construction in the country, and which is also the area where weather is less of an issue, showed a roughly a 9 percent gain in housing starts in both raw and adjusted numbers in January compared to December.

Building permits, seen as a sign of builders' confidence in the market, came in at an annual pace of 2.22 million in January, compared with the 2.08 million pace in December. Permits were expected to edge down to a 2.07 million.

The building probably was helped by mortgage rates retreating slightly from levels seen at the end of 2005. The average 30-year fixed rate mortgage rate was 6.15 percent in the month, according to mortgage financing firm Freddie Mac, down from 6.27 percent in December and 6.33 percent in November.

Still there have been numerous signs of a softening in the real estate and home building markets in recent months, and most housing economists expect both home sales and new building to slip from record levels reached in 2005.

"When one looks at the MBA data that reveal that applications for the purchases of new homes are down 7.5 percent on a year-over-year basis, it is not hard to see that the gain reported this month is not a sustainable trend," said Chan.


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