March starts slide: No worry?

It's easy to get caught up in waiting for the other shoe to drop...After all, it's been more than 12 years since the last major recession in the housing industry. So it should come as no surprise that more than a few people started running for cover when the U.S. Commerce Department reported a plunge of nearly 18% in March housing starts.

However, economists at the National Association of Home Builders say you don't need to worry much about the rest of 2005. It's 2006 that could be touch and go.

"These numbers bounce around from month to month," says NAHB staff vice president for economics Michael Carliner. "And February was not only way up, it was the highest ever on record for single-family starts, and the highest for total starts in 21 years. It was a record when it was first announced, and then the preliminary numbers were even revised upward. We never thought the level of starts in January and February this year was sustainable. So I don't view the drop in March as a sign of weakness," Carliner says.

Weather was another factor, according to NAHB chief economist Dave Seiders. He notes that building permits, though down 4%, were still strong — indicating that demand remains healthy. Since builders don't pull permits unless they plan to use them, Seiders views the gap between permits and starts as an indication poor weather held up some construction starts.

Seiders also believes the drop in starts may be, in part, due to builders turning cautious because of concerns that speculators are buying too many houses, artificially stimulating demand in the short run, but with the potential to show up later as excessive supply. "If the investor community should get worried, we could have a wholesale tumbling," Seiders says.

Another sign that housing is not yet on shaky ground is the recent — unexpected — drop in mortgage interest rates. "Since the beginning of April, we've had a 30 basis point drop in mortgage rates," Carliner points out. "And that's happening at a time of year when a lot of consumers are making buying decisions. In fact, what may happen is that, once again, because we expect higher mortgage rates, we again underestimate where housing starts will be by the end of the year."

Carliner believes other parts of the national economy are not yet as strong as expected. "For housing, that's a net positive," he says, "because it means interest rates stay lower than anticipated."

Finally, NAHB does a secret survey of large builders, which is never released to the public, but Carliner does reveal it shows huge backlogs of unfilled orders. "Another thing that's in that survey is cancellation rates," he says. "For the five years we've done the survey, they've run at or a little above 20%. For the last year, it's been running below 20%.

"So we know the largest builders have plenty to keep them busy for the rest of the year. And they don't operate in a vacuum. I think 2005 is pretty much in the bag," Carliner concludes. "But 2006 is a lot more iffy."