Some clouds in housing report gain

NEW YORK (CNNMoney.com) -- New home building increased overall in August, a government report said Thursday, but the gain was clouded by a dip in new construction of single-family homes.

The Census Bureau reported Thursday that builders broke ground for 598,000 new homes during August, up 1.5% from a revised 589,000 in July. That matched a consensus analyst forecast compiled by Briefing.com.

Building permits rose 2.7% to 579,000 from a revised 564,000 in July.

A troubling aspect of the report was that starts of new single-family homes fell 3% in the month. Overall starts were higher due to a big gain in multi-family housing starts.

According to economist Jeff Rosen of Briefing.com, multi-family home starts tend to vary much more than those of single family homes. He places more importance on the drop in single families than what could be an anomalous rise in multi-family starts.

The housing starts report was the latest in a series of releases that indicate that the market may have bottomed. These include improvement in new home sales, existing home sales and housing prices.

On Wednesday, the National Association of Home Builders reported their index of homebuilder confidence had risen a point to 19, its highest level since May 2008.

Helping to boost demand for new homes has been the first-time homebuyer tax credit, which has enabled many builders to reduce their inventories of unsold homes.

"Many builders have not only reduced excess inventory, but now are actually reporting such low inventory that they need to start more homes to replace those they've just sold," said Brad Hunter, chief economist for Metrostudy, a real estate analytics firm.

Both starts and permits are still well off from their levels of a year ago. The number of starts is down 29.6% from 849,000 last August, and permits dropped 32.4% from 857,000 last year.

Foreclosure cloud: There are some other clouds on the horizon. Foreclosures continue to trouble many markets; another 76,000 homes were repossessed by banks in August. That was actually an improvement over recent months, but the expectation is that the rate of foreclosures will begin rising again.

That's because a great number of non-conventional mortgage loans, including interest-only mortgages and option ARMS, will reset over the next year or so, yielding substantial increases in the monthly mortgage payments for homeowners. Many people will not be able to afford the increases.

With interest-only loans, homeowners pay just the interest for a fixed number of months, usually 60, before they have to start paying off the mortgage at fully amortizing rates. There was an explosion of these mortgages issued in 2005, so many will reset in 2010.

Option ARMs are loans in which borrowers are permitted to make minimum payments every month, payments that are less than their monthly interest charges. Many borrowers use that option for as long as they can, but once the mortgage balance reaches between 110% and 125% of the original loan balance, the loans reset into a fully amortizing mortgage -- and payments rise steeply since the balances themselves have also gone up.

Real estate analysts predict a spike in these resetting loans, which might force another wave of homeowners into foreclosure.

The fear is that all these foreclosed homes will flood the market and drive down prices even more for existing homes, making it harder for new-home builders to compete.

According to real estate analyst Mike Larson of Weiss Research, builders might be more confident except for concern over the end of the first-time homebuyer's tax credit, which enables buyers who have not owned a home for the past three years to take as much as $8,000 off the federal taxes they pay.

That program lapses on Dec. 1, although Larson figures the odds of extending it at better than even. "Still, builders may be scaling back until they see what happens to that," he said.