Housing Starts Rise 3.9% in November

(Housing starts report updated with analyst commentary.)

WASHINGTON ( TheStreet) -- Homebuilders began construction on 3.9% more homes in November, better than the expected growth rate, while applications for building permits fell 4%, pointing to a softening in future homebuilding activity.

>> Homebuilder Stocks: Behind the Numbers

The Commerce Department said early Wednesday that housing starts came in at a seasonally adjusted annual rate of 555,000 in November. The figure compares with an upwardly revised rate of 534,000 housing starts in October and came in better than the rate of 545,000 economists had expected, according to consensus estimates listed on Briefing.com. October's housing starts rate was originally reported at a pace of 519,000.

Despite better-than-expected results, housing starts in November remained 5.8% below year-earlier rates.

Applications for building permits fell 5% to a seasonally adjusted annual rate of 530,000, below the revised October rate of 552,000 and 14.7% below year-earlier rates. October's building permits rate was originally reported at 555,000.

Building permits are viewed as an indication of future home construction.

Thursday's disappointing building permits data further confirms that the "housing market recovery remains fragile at best," said Kevin Brungardt, CEO of RoundPoint Financial, a mortgage origination and servicing firm. He cited the usual suspects of high unemployment, potential buyers' low confidence in the stability of home prices and the large inventory of distressed properties that still need to be cleared.

Foreclosure activity declined dramatically in November, but Brungardt said the 21% month-over-month drop was "a false positive," a result of the so-called "robosigning" scandal that led to procedural delays and foreclosure moratoriums at servicers like Bank of America ( BAC) and JPMorgan Chase ( JPM). Even Fannie Mae ( FNMA.OB) and Freddie Mac ( FMCC.OB), which stand behind the vast majority of U.S. mortgages, have said they won't push forward on foreclosures during the holiday season.

Brungardt estimated that the shadow inventory of homes could take two to three years to clear to a point when housing supply and demand begin to match up again, and that no acknowledged housing bottom will appear until that shadow inventory is significantly curtailed.

Homebuilders should expect material dampening of new-home purchases until then, Brungardt forecast. Current homeowners will also continue to be impacted unfavorably, he said.

Brungardt added that the recent spike in mortgage rates -- a jump of 70 basis points over a short period of time -- also worked to delay a housing market recovery. Rates are still historically low, he conceded, but need to stay in the 4.5% to 4.75% range in order to fuel a meaningful recovery.

>>Mortgage Activity Eases as Rates Edge Up

He expects mortgage rates will fall again and then level out for a period of time.

The average rate on a 30-year fixed mortgage increased to 4.84% in the week ending Dec. 10, from 4.66% in the prior week, the Mortgage Bankers Association said early Wednesday. It was the highest rate observed since early May and was the fifth consecutive weekly increase.

On Wednesday the National Association of Home Builders said its index of homebuilder sentiment came in flat in December, month-over-month, as interest among potential buyers remained sluggish.

The NAHB index, which measures builder perceptions of current single-family home sales and sales expectations for the next six months, came in flat at a reading of 16 in December, disappointing industry watchers who expected the index to tick up to 17, according to consensus estimates from Briefing.com. Any reading below 50 indicates poor sentiment. The index has not been above 50 since April 2006.

>> Homebuilder Sentiment Disappoints

"Builders are bracing themselves for a slow holiday season as a number of factors continue to cause uncertainty among consumers and builders alike," said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. "While the housing market index adjusted for seasonal factors, the typical cold-weather slowdown in sales activity is being accentuated by ongoing weakness in the job market, the rising number of foreclosures and short-sales, and very challenging credit conditions for both builders and buyers."

"The steady but low level of the HMI reflects the fact that builders and consumers have yet to see consistent signs that the economy is improving," noted NAHB Chief Economist David Crowe. "The good news is that the index and its subcomponents remain above recent lows from the early fall. NAHB expects an improving job market this spring will help prospective buyers feel more confident and propel more sales activity in 2011. However, the continued problems that builders are facing in obtaining construction credit and accurate appraisal values could significantly slow the onset of a housing recovery."

Stocks in the homebuilder sector were mostly higher Thursday following the report on housing starts and building permits. The SPDR S&P Homebuilders ( XHB), an exchange-traded fund that tracks the sector, was 1.2% higher inearly-afternoon trading, while the iShares Dow Jones US Home Construction ( ITB) ETF rose 1.4%.

Among individual builders, D.R. Horton ( DHI) gained 1.9%, KB Home ( KBH) 2%, PulteGroup ( PHM) 1.9% and Lennar ( LEN) 0.2%.

Hesitancy among potential home buyers had been a key driver of builders' low sentiment in recent months as uncertain consumers did not yet feel secure enough with the jobs market and overall economy to make such large purchasing decisions.

Near-record-low mortgage rates failed to spark robust demand for housing in recent months.

The U.S. housing market continues to struggle and has been under tremendous pressure for some time. Demand fell further after the expiration of federal tax credits for homebuyers earlier this year.

Some potential homebuyers have decided to go ahead and sign contracts, hoping to lock in still-low rates. Homebuilder Toll Brothers, which surprised investors with a return to year-over-year profitability in its fiscal fourth quarter, recently said deposits jumped 10% in the second half of November compared with year-earlier results.

While any mortgage demand can be viewed in a positive light, the still-struggling housing market continues to be plagued by sluggish demand, in part because of the tight credit market and inability of many potential buyers to access the credit they need to finance a mortgage.

Many Americans suffer from negative equity, where the amount they owe on their home is higher than the value of it, making them unqualified for refinancing.

Still-depressed home prices do not seem to make it any easier. The S&P/Case-Shiller 20-city index of national home prices rose slightly in September but home prices across the U.S. fell 2% in the third quarter after rising 4.7% in the second quarter.

-- Written by Miriam Marcus Reimer in New York.

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