Despite Bad News on Housing Market, Outlook is Positive for 2014

TheStreet.com

NEW YORK (TheStreet) -- There's reason to be on edge as more news pours in about volatility in the the U.S. real estate market, with some especially sour news on the housing starts front. But a little analysis paints a more reassuring picture.

According to the National Association of Homebuilders, nationwide housing starts fell by 9.3% in June, and building permits slid by 4.3%.

Market observers were taken aback by the report, seeing a big slide in housing starts as incompatible with a housing environment offering relatively low mortgage rates and tight inventories -- which both should trigger higher housing start activity.

One reason for the downturn in home starts may have something to do with geography, which might make the news not be as bad as originally thought.

"The decrease was concentrated in the South, where starts fell 29.6%, while starts rose in the other three regions," says Dean Maki, an analyst at Barclays. "It is unclear what led to the sharp decline in housing starts in the South in June, but the rise in single-family permits in June and the increases in the NAHB homebuilders index in June and July suggest that starts will increase in the coming months."

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A longer-term view softens the bad news even further, Maki says.

"It is also worth highlighting that housing starts rose an annualized 26.2% in the second quarter of 2014 after plunging in the first quarter due to adverse weather conditions, so residential investment is still likely to make a positive contribution to the second quarter real GDP growth, despite the weakness in June."

NAHB officials agree with the sentiment that the housing market will bounce back, as bad as the June numbers appeared to be.

"A modest 2.6% increase in single-family permits falls in line with the general optimism that we are hearing from our builders," says Kevin Kelly, chairman of the NAHB.

"Take away the South and nationwide housing starts would have been in positive territory this month," adds David Crowe, NAHB's chief economist. "This sharp regional decline could be due in part to lots and labor shortages, which are particularly acute in that part of the country. However, the general direction of housing production is trending upward, and we expect 2014 to be a positive year."

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Another positive benchmark is an apparent bottoming out in foreclosures, which fell by 2% in June, the lowest level since 2006 before the housing bubble burst.

Foreclosures are also down by 16% from last year. From a foreclosure point of view, things really seem to be getting back to normal. 

"Nationwide foreclosure activity in June reached an important milestone, dropping to levels not seen since before the housing price bubble burst in August 2006," said Daren Blomquist, vice president at RealtyTrac. "Over the next six to nine months nationwide foreclosure numbers should start to flatline at consistent historically normal levels.

"There continue to be concerning trends in some states and local markets that clearly indicate those markets are not completely out of the woods when it comes to the lingering foreclosure problem left over from the housing bust," Blomquist adds. "While it's important that any remaining foreclosure infection is addressed promptly to keep it from festering, foreclosures are no longer a widespread contagion threatening to derail the housing market's return to full health."

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