Housing Starts Drop Drastically Following Stimulus

Housing starts fell 10 percent, the biggest decline since March 2009, to a 593,000 annual rate, from a revised 659,000 pace in April that was less than previously estimated, Commerce Department figures showed today in Washington. Building permits, a sign of future construction, unexpectedly fell to a one-year low. Single-family starts suffered the largest drop since 1991.

Builders focused less on starting new projects and more on completing houses for those seeking to qualify for the tax credit, which required contracts be signed by April 30 and closed by the end of this month. Growth in sales and construction will now depend more on job gains and a drop in foreclosures, which have pushed down prices and created competition for builders. – Bloomberg.com 6/16/2010

Homebuilders are pulling back as they fear the fallout after the expiration of the first time homebuyers’ tax credit, which enticed buyers into the market with an $8,000 tax break for purchasing a home.  Starts on single family residences were the hardest hit, dropping by an estimated 17%, the most dramatic collapse in 19 years.  The south was the hardest hit region as overall starts fell by more than a fifth in May.  Building permits, a leading indicator of housing starts, also declined by about 9.9% almost matching the 10% declines in April.  Although the housing market has stabilized over the last half a year, the chorus calling for a double dip in housing is growing louder as data such as this runs counter to a sustainable recovery thesis.

The weakness in housing in the wake of the tax incentives has caused some in Washington to wonder whether the tax credits should be extended yet again.  They were set to expire last November, but lawmakers extended them to apply to contracts signed through April 30th.  Now, Senate Majority Leader Harry Reid has proposed another extension, this time for three months.  One has to wonder; then what?  Tax incentives have had the desired effect of generating demand for housing, and once that incentive is withdrawn there will be a lull.  We believe it is reasonable to think that the longer the tax break is in effect, the more pronounced the days of reckoning will be.  Many have compared the phenomenon to a drug addict just looking for a fix, when in fact it does not really fix anything.

I believe that people are driven to act in their own best interest, and I do not blame anyone for taking advantage of the homebuyers’ tax credit.  In fact, I am one of the beneficiaries, but lawmakers must realize that extending the rebates will only kick the can down the road.  We saw this same process with cash for clunkers: the program ignited demand for vehicles, it ended and sales sagged for a time, now months removed sales are showing relative strength without rebates or incentives.  It is the pull-forward effect of consumer demand, and it has to be pulled (at least to some extent) out of the future.

We do not believe an extension of the tax credit will stave off a double dip, if that is even in the cards, it would only serve to delay it.  It is time to simply allow the market to rebalance after the pull-forward.  It has worked thus far for cash for clunkers (also extended once) and it will likely be the same story for housing.

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