Piggy-backing on yesterday’s report showing a decline in home builder sentiment, housing starts and building permits continue to show that residential construction has stabilized, but home builders aren’t getting a whole lot of traction from the extension and expansion of the home buyers tax credit.
Housing starts in February fell 5.9% to an annual pace of 575,000 units. Building permits, which are more forward looking, were down 1.6% to 612,000. Consequently, the second monthly decline in permits suggests that traffic among prospective buyers and the sale of new homes is still sluggish.
Looking at the chart above, the new home market has stabilized, but builders still face plenty of competition from foreclosures and short sales. And until this problem is resolved, it seems unlikely we will see a noticeable acceleration in new home sales.
New vs. used
New home sales make up less than 10% of overall sales; however, the construction of new homes directly boosts GDP because residential construction is part of the GDP equation. In addition, new home sales also have an indirect impact on GDP since new models will require lumber, drywall, roofing materials, appliances, etc.
The sale of existing homes, though not included in GDP, has an indirect impact on the economy. New home owners who buy existing homes are much more likely to replace furniture or take on projects to modernize or add personal touches to the house.
Plus, realtors and mortgage lenders benefit from the purchase and sale of houses via commissions, enabling them to employ a number of processors and assistants.
With interest rates hovering near record lows, a surge in home buying would provide a needed shot in the arm to the economic recovery, adding some depth to what so far has been an uneven, fragile and shallow recovery.
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