BLAME IT ON THE RAIN: SLUMP IN HOUSING STARTS DRIVEN BY RECORD DROP IN THE SOUTH

BY: Kris Hudson

We have yet to see the first-time homebuyer enter the housing market, and without them we are missing a critical segment of the “housing food chain.” Avison Young Capital Markets Group vice president Jason Meister joins Simon Constable on the News Hub to discuss the severity of the housing stall.

WASHINGTON—U.S. home construction tumbled in June due to a stretch of wet weather in the South, a decline that analysts said was likely a temporary departure from a trend of recovery in the housing market.
Housing starts sank 9.3% last month to a seasonally adjusted annual pace of 893,000. It was the weakest showing since September 2013 and the second-straight monthly drop, the Commerce Department said Thursday.
The June decline driven by a nearly 30% decline in the South, the largest monthly decrease on record for that part of the country. Other parts of the U.S., however, posted increases. Construction in the Midwest was up 28%, while the Northeast was up 14%.

The problem in the South, home builders say, is that the region’s unusually wet winter and spring limited the number of home lots ready for construction. By June, a shortage of such build-ready lots left several builders unable to start constructing enough homes to meet demand.

Some builders also mentioned that municipal permitting processes are taking longer this year, perhaps due to short staffing in city building departments.
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“We’ve had such a wet winter that the development cycle has elongated,” said Terry Russell, chief executive of Atlanta-based builder FrontDoor Communities, which anticipates selling 175 homes this year in Georgia and South Carolina. “It’s at least two or three months longer [to develop a lot], and that has a significant impact on starts.”

Brad Hunter, chief economist at home-building research firm Metrostudy, part of Hanley Wood LLC, said the lot-shortage issue spans several southern states. Other U.S. regions saw little dropoff in their regular production cycles because they don’t typically build much through the winter, but the South does. Thus, the South’s slowdown in lot-development in the winter and spring is slowing its summer construction starts in relation to past years, he said.

The slowdown in the in South—defined as a huge region stretching from Maryland to Texas to Florida—could result in a pickup in starts later in the summer, analysts said. Eric Green, global head of research for T.D. Securities, called the report “exceptionally uneven and on balance is not an indication of a significant turn in housing construction.”

Though the Commerce report was a disappointment overall, there were a few silver linings: For the entire second quarter, construction of single-family homes was up 4% from a year ago, compared with a 2% yearly decline for the first three months of the year. Permits for single-family homes were up 2.6% from the prior month and housing starts were up 7.5% from a year earlier.

Among builders, perspectives are varied on the state of the new-home market. Drees Co., a closely held builder based in Fort Mitchell, Ky., started construction of 140 homes last month, down 2% from May and down 8% from a year earlier.

Mark Williams, chief financial officer at Drees, attributed the dip in starts to weak sales, slower permitting by municipalities and tepid consumer confidence even amid decent job growth. “Clearly, lower sales resulted in slower starts,” Mr. Williams said. “Consumer confidence being down a little bit always affects sales. People don’t like to buy homes when they don’t feel really good.”

This article originally appeard in the July 17, 2014 online edition of the Wall Street Journal.