Mixed Messages From Housing Data

While the housing starts number is 'horrific,' it could be good news for builders clearing out inventory.
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Housing starts in October tumbled 14.6% from September, a much steeper decline than expected, as the southern region of the country saw particularly weak results.

October housing starts came in at a seasonally adjusted annual rate of 1.49 million units, compared with the revised rate of 1.74 million in September, the Commerce Department said. The rate dropped 27.4% from a year earlier.

Economists expected 1.68 million starts in October, according to estimates from

Reuters

.

"The number was horrific. It was far worse than expected," says Phillip Neuhart, an economic analyst with Wachovia. "It's no question that this is showing that this market is still weak and that September was not the bottom."

But Neuhart says the news could be good for homebuilders, which are currently plagued by an oversupply of homes for sale.

"Homebuilders are trying to clear inventory. And as they clear inventory, we're not going to see strong starts," he says.

In the South, which had been the strongest market during the housing boom, starts dropped 26.4% from September to October. Cold and rainy weather throughout much of the region during the month may have exacerbated results.

Meanwhile, building permits in October were at a seasonally adjusted annual rate of 1.54 million, 6.3% below the September rate and 28% below the year-earlier level.

"We view the decline (in permits) as a positive, as this will lead to less construction activity and help to ease the glut of supply," wrote Bank of America analyst Daniel Oppenheim in a research note Friday.

While potentially good for builders, the slowdown in residential construction will continue to hurt the economy. Wachovia projects GDP will grow just 1.4% in the fourth quarter and 2.1% in 2007 because of the housing slowdown. In the third quarter, residential construction comprised 5% of GDP.

Nonetheless, the bad news for builders is that housing completions remain at high levels.

Total housing completions in October were at a seasonally adjusted annual rate of 1.95 million, down just 0.7% from a year earlier, but down 3.8% from September, the Commerce Department said.

Single-family housing completions in October were at a rate of 1.56 million units, which is 8.3% below the September figure.

Homebuilders fell slightly on the report.

D.R. Horton

(DHI) - Get Report

was down 1.9% to $24.47, and

KB Home

(KBH) - Get Report

fell 1.9% to 47.88.