Woes deepen for home builders

Housing starts unexpectedly rise in June, but applications for new projects slump to lowest level in 10 years; outlook grows more bleak.

By Grace Wong, CNNMoney.com staff writer

LONDON (CNNMoney.com) -- The outlook for the housing sector has grown bleaker after a key measure of builder confidence fell to its lowest level in 10 years, according to a government report released Wednesday.

Building permit activity, considered a gauge of builder confidence, sank to a 1.41 million pace last month from a 1.52 million rate in May, according to the Census Bureau. Economists surveyed by Briefing.com had expected a decline to 1.49 million.

Home builder stocks have plummeted in the last six months while the broader market (purple) has gained.
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Home builders broke ground on new projects at a higher than expected rate in June. Housing starts rose unexpectedly to an annual rate of 1.47 million from a revised 1.43 million in May, according to the government report.

While housing starts increased, they tend to be volatile and vary depending on weather conditions across the country. Permits, on the other hand, generally are less influenced by weather and are considered an indicator of future housing activity.

Weakness in the housing sector has dragged on economic growth and home sales are expected to remain sluggish for some time, Federal Reserve Chairman Ben Bernanke told Congress Wednesday.

"Declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time," he said in prepared testimony.

The housing slump has dragged on as home builders have battled a decline in housing sales and prices while dealing with a glut of supply. On Tuesday, the National Association of Home Builders, a trade group, said its home builder sentiment index fell in July to its lowest level since 1991.

"The optimism of builders couldn't be any worse," said Pat McPherron, economist at Moody's Economy.com. "There's no demand, there's nothing in the pipeline."

Problems in the subprime mortgage sector, which gives home loans to borrowers with poor credit, have added to home builder woes. Lenders have clamped down on credit, which has made it harder for some people to buy homes.

Troubles in the subprime sector have also led to "rising foreclosures, defaults, and homeowners selling their homes to avoid default," which has made matters even worse for builders, Global Insight economist Patrick Newport wrote in a note.

Some say a slowdown in building permit activity could provide a longer-term benefit for the battered housing market by helping to choke off supply. An oversupply of homes on the market has depressed home prices, and that weakness in pricing is believed to be keeping some potential buyers on the sidelines.

But most economists agree there will be more pain before the market rebounds. The National Association of Realtors, an industry group, warned last week that it could take longer than previously forecast for the housing market to find a bottom. The group said it doesn't expect home prices to recover until the second quarter of next year.

The ongoing problems in the sector have weighed on the results of home builders. Pulte Homes (Charts, Fortune 500) said on Tuesday it expects to post a hefty loss for the second quarter due to weak consumer demand.

Lennar (Charts, Fortune 500), KB Home (Charts, Fortune 500), D.R. Horton (Charts, Fortune 500) and Ryland Group (Charts, Fortune 500) have all either reported or warned of unexpected losses in recent weeks.

In addition builder Centex (Charts, Fortune 500) has posted an operating loss in its two latest quarters, while Hovnanian Enterprises (Charts, Fortune 500) has had three quarters of losses. Top of page