Housing Data Inspire Little Hope

The month-over-month rise in housing starts in April is a surprise, not necessarily a good one.
By Nicholas Yulico ,

Updated from 9:18 a.m. EDT

Housing starts and new building permits came in higher than expected for April, but most of the boost came in the apartment and condo segment, as single-family construction remained weak.

Housing starts totaled a seasonally adjusted annual rate of 1.03 million in April, which was up 8% from March but down 31% from a year earlier. Economists expected 940,000, according to

Briefing.com

.

Single-family starts, however, fell 2% from March.

"Despite the headline rise, we're not seeing this as a great report by any means. Builders still aren't confident the market has bottomed, and neither are we," says Adam York, an economic analyst with Wachovia.

"All of the gains were in the multifamily segment, which historically is extremely volatile," he says.

Building permits, an indicator of future demand, totaled an annual rate of 978,000 in April, which was up 5% from March but down 34% from a year earlier. Single-family starts rose 4% from March.

The best piece of news in the report was that housing completions in April fell to an annual rate of 1 million, which was down 16% from March and down 35% from last year. Single-family completions fell 13% from March.

"Obviously we need to continue to build less homes to work off excess inventory we have," York says.

After an initial premarket surge higher, homebuilder stocks were up just fractionally in morning trading Friday, as investors recognized the starts report carried mixed messages for the building industry. Three of the largest builders --

Pulte Homes

(PHM) - Get Report

,

Centex

(CTX)

and

Toll Brothers

(TOL) - Get Report

-- were either flat or up just 1% in early trading.

Stephen East, a homebuilder analyst with Pali Capital, says any rally in the builder stocks today made little sense, since the housing start numbers signaled that more housing inventory was set to come on the market at a time when new-home sales are still declining.

New-home sales have plummeted from an annualized rate of 607,000 in January to 526,000 in March, while inventory rose from 9.7 months of supply to 11 months in the same timeframe. The latest government data on new home sales will be released in late May.

"At this point in the housing cycle, only two metrics that report stronger-than-expected results -- sales and pricing -- should be rewarded in the market. Eventually, permit and starts increases will be important, they are not today," East wrote in a note to clients Friday morning.

"Inventories must be reduced to stop housing price slides which will then stimulate better demand from a less skittish consumer. These numbers increase inventory," East wrote.

Also on Friday,

Fannie Mae

( FNM) said that in June it will stop requiring higher down payments for homebuyers in markets where home prices are declining. The government-sponsored entity, which is the largest buyer of mortgages in the U.S., said the minimum down payment required nationally is 3% to 5% but varies based on property type and location. Fannie shares fell about 3% to $29.45 in recent trading.

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