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Housing Starts Fall to Record Lows Again, Surprising Wall Street

Yesterday, I was surprised to see housing economists predicting a modest upturn in the number of housing starts. They were clearly looking for the numbers to point upward - a sign, any sign, that their predictions that the housing market was forming a floor were true.

I've been wondering what they're smoking.

Sure enough, housing starts fell to record lows (again!), a decline of 12.8 percent to a seasonally adjusted annual rate of 458,000 units. This is the lowest pace on record going back a half century, according to the Associated Press.

Housing economists had predicted a slight increase in the pace of new construction, expecting a seasonally-adjusted annual rate of 520,000 units. Whoops!

The way I see it, new construction builders of condos and single-family developments have a host of problems to solve before the housing market floor gets officially formed:

  1. Buyers are rightfully worried about purchasing a home in a development that's partially sold. If the developer runs out of money, is foreclosed by the lender and the property is then resold to another developer, there is no assurance to the home buyer that whoever picks up the property will build it out the way it was originally envisioned. Also, homeowners in the development may be stuck contributing more than their fair share in assessments if the developer is tapped out. And if you buy in a new construction development that's half full, what's the exit strategy? You won't develop any additional equity in the property until the entire development is completed and demand picks up. Finally, if the developer goes bust, who's going to finish building the roads and other common elements and amenities of the property?
  2. Condo buyers have financing issues. The new rules from Fannie Mae and Freddie Mac make it a lot tougher for condo buyers to finance their units if more than 15 percent of condo owners are behind in their assessments, if the building reserves aren't up to the required level, if they don't purchase a higher level of homeowners insurance, and if more than 30 percent of the units aren't owner-occupied.
  3. You can't collect $8,000 if the house isn't built by November 30, 2009. Many first-time buyers would love to buy new construction, but they're limited to purchasing a home that's already under construction, is nearly completed, or is finished and ready to move in. I just counseled a first-time buyer who called my May 17th radio show not to buy a new construction house off the plans if she hopes to close by the end of November. There's too much risk that the house won't be finished. You can't close on a half-finished property and still collect your $8,000 from Uncle Sam.
  4. There's a lot of inventory out there. Why would a lender offer financing to a developer to start a new project when there's so much inventory out there? Developers are falling all over themselves to offer insanely attractive deals with good financing. Why isn't that working? (See #1.)
The money that's out there is being used to finish construction on half-constructed buildings. But there isn't financing available right now for projects like the Chicago Spire, a 120+ story building whose pylons are already sunk into the shores of Lake Michigan.

(At the opening of his new building in Chicago last year, Donald Trump gloated that his project was finished and there weren't any other going to be built for awhile. True enough, though his building isn't quite sold out either.)

What does the near future portend? My friend Mark is a land planner whose firm of 20+ has been pretty busy over the past decade helping developer get through village planning meetings, design developments and assist in the thousands of details that go into getting a housing development built. This year? Not so much. He's been referring to 2009 as "the lost year."

If your intention is to pull some permits and start building, you're going to have to spend some time with someone like Mark. His calendar is wide open. And he's starting to worry that 2010 will be lost as well.