Market Talk

This baby's still available

Home building rose for the third time in four months, but keep in mind this trend’s sustainability is certainly in question.

Housing starts increased 0.5% to a 590,000 annual rate, albeit less than economists were expecting, which proves that the housing market is still very reliant on government support and low interest rates despite earlier signs of recovery.

With the $8,000 first-time home buyer tax credit set to expire and no imminent signs that it’ll be extended, it’ll be interesting to see how the housing market will react if the government support doesn’t continue.

“The recent trends in starts becomes irrelevant in extrapolating future building if the tax credit doesn’t get extended,” says Miller Tabak equity strategist Peter Boockvar.

He thinks another “cash-for-clunker type hangover” could occur in the housing market, especially since “most of those who took advantage of the tax credit were going to buy a house anyway,” he notes.

“All we did was pull forward demand,” similar to what the auto industry did this past summer.

Keep in mind that housing is extremely seasonal, so the summer months that offered some glimmers of hope in the depressed market may become distant memories through the end of the year.

“This part of the calendar is expected to slip straight through to January,” FusionIQ CEO Barry Ritholtz says.

The tax credit will ultimately come to an end and the Fed’s zero interest-rate policy won’t last forever. Add it all together and “you have a recipe for slowing permits, starts and sales,” he adds.

Still, housing starts are sharply higher from their all-time record low set in April. But starts had rebounded to 590,000 in June, so all they have to show for themselves is sideways movement throughout the last few months, Calculated Risk notes.

Additionally, single-family completions of 464,000 are still less than single-family starts of 501,000.

“This suggests residential construction employment may be near a bottom,” Calculated Risk says. “However, as expected, it appears starts are now moving sideways — and will probably stay near this level until the excess existing home inventory is reduced.”