New Homes Competing Against Foreclosures

Builders broke ground on fewer homes in April as the new-home sector continues to face competition from a glut of foreclosures that in many markets has brought home values down.

Construction on homes and apartments dropped 10.6 percent to a seasonally adjusted annual rate of 523,000 units, the Commerce Department reported on Tuesday. In March, housing starts reached a 585,000-unit pace (an upward revised figure). Residential construction is down 23.9 percent compared to April of last year--its largest drop since October 2009.

Considered the “volatile part” of the new-home market at the moment, construction of multifamily homes (buildings with five or more units) particularly hampered housing starts last month, decreasing 28.3 percent. Single-family home construction--which generally makes up 75 percent of all housing starts--dropped 5.1 percent from a month earlier.

Regionally, the results were mixed. In the South, housing starts dropped 23 percent and 4.8 percent in the Northeast. However, the Midwest posted a 15.7 percent gain in housing starts, as well as the West with 3.7 percent.

Permits for future home construction dropped last month, falling 4 percent to a 551,000-unit pace last month, the Commerce Department reports.

The Distressed Sales Impact

New-home construction is being weighed down by an oversupply of existing homes on the market, particularly foreclosures, experts say. Buyers are increasingly choosing bargain-priced foreclosures and previously owned homes over--in general--pricier new homes.

“Builder confidence has hardly budged over the past six months as persistent concerns regarding competition from distressed property sales, lack of production credit, inaccurate appraisals, and proposals to reduce government support of housing," NAHB Chairman Bob Nielsen said Monday in statement about the National Association of Home Builder/Wells Fargo Housing Market Index, which shows builders’ confidence about the new-home market remains low.

Source: “U.S. Housing Starts, Permits Fall in April,” Reuters News (May 17, 2011