Housing Starts Fall, Remain Elevated

The U.S. Department of Commerce said new housing starts fell 5.6% from September's level and were below consensus expectations but remain above the 2 million mark, where they've been for over a year.

Housing starts in October were at a seasonally-adjusted annual rate of 2.014 million, down 5.6% from the revised September estimate of 2.134 million and 2.3% below the October 2004 rate of 2.062 million. Economists surveyed by Bloomberg were expecting annualized starts of 2.07 million in October.

Single-family housing starts in October were at an annual rate of 1.704 million, 3.7% below September.

Gina Martin, a Wachovia economist, says the report is evidence the housing market is flattening but not dramatically declining.

"We're kind of plateauing here for good reason. Houses are becoming less and less affordable and consumers are not as interested," Martin says.

However, Hilary Kramer, chief investment strategist for A&G Capital Group and a consultant to Freddie Mac (FRE Quote), says the October starts numbers are indicative of a slowdown. Two weeks from now, she expects price declines to manifest when the data is released on new and existing home sales for October.

The October drop in starts "is telling us that the homebuilders know that there is a decline in not necessarily demand, but in the ability of homeowners and individuals to buy a home and continue moving up," Kramer says.

So much of the current housing boom has been dependent on the ability of consumers to stretch themselves and trade up to higher priced homes, she says, but at some point this has to stop, even if builders don't stop bringing new inventory to the market. "They'll just keep building until they go bust," she says.

It will be interesting to see how homebuilder stocks react to the news; the Philadelphia Stock Exchange Housing Sector Index was up 0.85% in early trading Thursday. The sector gained some support Wednesday after D.R. Horton(DHI Quote), the country's largest builder, reported that its fiscal fourth-quarter earnings rose 62% and said that its net orders increased 33%. The company also gave positive future guidance, saying its earnings per share would rise roughly 16% to 20% in fiscal 2006.