Housing Starts May Drop to 14-Year Low
By Bob Willis
November 17, 2007

Nov. 18 (Bloomberg) -- Housing starts in the U.S. fell to a 14-year low in October, signaling the real-estate slump will continue to weigh on growth, economists said before a report this week.

Construction fell 1.8 percent to an annual rate of 1.17 million homes, according to the median forecast of economists surveyed by Bloomberg News before a Commerce Department report on Nov. 20. Building permits, an indicator of future activity, fell 2.1 percent to a 1.2 million pace, economists forecast.

Sales are dropping and inventories are growing as the collapse in subprime lending and the prospect of further declines in property values scare away buyers. Tumbling residential construction will weaken the economy into 2008.

"The housing recession looks far from over," said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York. "Builders continue to cut construction aggressively."

A Nov. 19 report will reinforce the view that prospects for the housing market are worsening. The National Association of Home Builders/Wells Fargo index of builder confidence probably fell to a record-low 17 this month from 18 in October, according to the survey median.

Sales of previously owned homes fell in September to the lowest level since record-keeping began in 1999, while new-home sales rose from an 11-year low, according to reports last month. Housing starts in September were down 48 percent from their peak in January 2006.

Canceled Contracts

Toll Brothers Inc., the largest U.S. luxury homebuilder, said Nov. 8 that fourth-quarter revenue fell 36 percent and the rate at which contracts were canceled rose to the highest ever.

"We do think that this is worse than it was in '88 through '90," Chairman Robert Toll said on a conference call. "We can't predict how long this down-period will last."

A report Nov. 21 from the Conference Board is likely to show the housing recession is spilling over to the broader economy.

The New York-based private research group's index of leading economic indicators declined 0.3 percent for October, according to the survey median, after increasing 0.3 percent the prior month.

The index, which points to the direction of the economy over the next three to six months, includes housing permits as one of its components. An increase in the number of people filing first-time claims for jobless benefits and fewer orders for consumer goods and for capital equipment also contributed to the projected decline, economists said.

Less Optimistic

A measure of consumer expectations for the economy over the next six months is another of the 10 indexes that form the leading gauge.

Sentiment is weakening as home values fall and gasoline prices climb, raising risks of a slowdown in the spending that accounts for two-thirds of the economy.

The Reuters/University of Michigan final consumer sentiment index, due Nov. 21, fell to 75 in November from 80.9 the previous month, according to the survey median. That is the lowest reading in two years and matches a preliminary result published Nov. 9.

The growth outlook for the rest of 2007 and 2008 has deteriorated since August, when concern over defaults on subprime mortgages squeezed access to credit, prompting further drops in home sales.

Forecasts Cut

Economists surveyed by Bloomberg in early November forecast the economy would grow at an annual rate of 1.5 percent in the fourth quarter after expanding at a 3.9 percent pace in the previous three months. They forecast 2 percent growth in the first quarter of 2008.

Fed Chairman Ben S. Bernanke told a congressional hearing Nov. 8 that policy makers expected growth to "slow noticeably" in the current quarter and remain "sluggish" in the first half of 2008. "The contraction in housing-related activity seemed likely to intensify," he said.

The Fed has lowered its benchmark interest rate twice in as many months, taking it to 4.5 percent, to prevent the turmoil in financial markets and the recession in real estate from bringing the expansion to an end.

Trading in Fed funds futures suggests investors are betting on another quarter-point cut in the benchmark rate at the next meeting on Dec. 11. Even so, Fed policy makers in recent days have signaled they are on hold for the foreseeable future.

"The current stance of monetary policy should help the economy get through the rough patch during the next year," Fed Governor Randall Kroszner said Nov. 16 in a speech in New York.

Minutes of the Fed's Oct. 31 meeting will be issued on Nov. 20. The report will be the first to contain expanded forecasts for growth and inflation that form part of the central bank's drive to improve transparency in communications.

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