Biggest drop in US housing starts since 1980

Daniel Pimlott
Financial Times
Friday January 18, 2008

New residential building in the US last year suffered its biggest drop in nearly three decades, according to government data published on Thursday that highlighted the dramatic downturn in US housing.

Housing starts for 2007 fell by more than 25 per cent to 1,376,100 homes. The largest previous drop was recorded in 1980, as the US entered a deep recession.

Builders broke ground on fewer new homes in December, leaving the annual rate of construction at 1,006,000 – its lowest level since 1991, and down 14 per cent from November and 38 per cent from the same month a year earlier.

Permits issued to build new homes, which signal future construction trends, fell 8 per cent in December, and were 34 per cent down year-on-year.

The plunge in starts was driven by a 40 per cent drop in the volatile multi-family sector - single-family starts dropped by only 2.9 per cent.

The housing data may be the worst in decades, but economists say that housing starts need to fall in order to run down record inventories of homes already on the market.

“The rate of decline of permits has re-accelerated markedly since the turmoil in the markets began in the summer; builders have finally thrown in the towel,” said Ian Shepherdson of High Frequency Economics. “This is a precondition for recovery, as it will eventually reduce the inventory overhang, but there is a long way to go.”

As the US economy slows, sales of homes are likely to fall further as buyers hold off from making purchases. Foreclosures on properties are also set to rise, boosting the supply of homes on the market and further depressing construction.

The dismal housing situation was somewhat relieved by data on weekly unemployment claims, which fell 21,000 to 301,000, the lowest level since May and well below the consensus estimate of 331,000.

Economists suggested that the drop might be due to seasonal factors, but the fact that the jobs situation did not deteriorate dramatically was taken as a positive indicator.