Housing Construction Drops 14.6% in October

The housing market took a huge blow in October, as figures put out by the Commerce Department on Friday show. The building of new houses and apartments dropped to an annual rate of 1.486 million units last month, down 14.6 % from the September level. That’s the biggest drop in more than six years. Yet the Fed still worries about inflation.

The housing market has been a significant engine of growth as housing prices have risen. People have refinanced to take equity out of their properties that they promptly took to the mall. Americans achieved negative savings rates in recent months with this method of spending. As the economist Herb Stein (Ben Stein's father) used to say, “If something can’t go on forever, it won’t.” The hot US housing market is now officially cool to cold.

In support of this is the eighth consecutive month in which applications for building permits (obviously a leading indicator of future construction) dropped. October’s rate fell 6.3% from September’s rate, which annualized would result in 1.535 million new units. Since no every building permit results in new construction immediately, it is clear that the construction doldrums will last into next year.

New housing starts occur because there is demand that the market tried to supply. When such starts drop, it is a sign that there has been over-building relative to demand, classic market over-shoot. In other words, people aren’t buying new houses because interest rates are up, and prices have gone crazy in a great many markets. Simply put, affordability has gone out the window.

Federal Reserve Chairman Ben S. Bernanke said in an interview last month when asked about the housing slide, “How far will the correction go? It’s very difficult to tell, is the honest answer.” Indeed, it is, but there is no disputing that there is a correction going on. Mr. Bernanke can either leave interest rates where they are (or even drop them) to let the market work things through, or he can exacerbate it by another “pre-emptive” rate hike. The Fed seems to be worried more about the future risks of inflation than the current risk of a housing bust.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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