October New Residential Construction Commentary

The above graph is a visual representation of the Seasonally Adjusted New Residential Construction & Sales data through October 2008. The lines represent Total Permits and Starts, Single Family Permits and Starts, Single Family Units Sold, Total Under Construction and Single Family Under Construction. It is worth noting that there have been several construction downturns since 1959, and that we are at levels that have triggered recovery in all of the past housing downturns.

Looking at Starts only, we see that Total Starts are the lowest they have been before beginning recovery, and Single Family starts are within a few thousand units of the lowest they have been before beginning to recover. Based on the permits we have see in the Atlanta area, November may give us new lows for all aspects of residential construction. Lumber and Panel prices are at or below sustainable levels, with many lumber items at multi-decade lows.

There are several unknowns at this point. Although the quantity of Single Family Homes for Sale is the lowest it has been since May, 2004, there is a 9.1 month supply available. Our economy is probably in a recession, and people don't tend to think about buying a home during a recession.

Capacity for single family residential construction continues to fall as builders, building material product suppliers, and lumber and panel mills continue to downsize or shutdown completely.

Lumber and housing permits/starts

As housing permits and starts fall, there is less demand for building materials used in new home construction. Without significant reductions in building material availability to reduce supply, prices of those materials will fall. There currently seems to be excess supply at every level of the building material chain, from the producers to the end users.

The lumber chart below illustrates the result of prices falling as demand from new construction falls, while the supply does not decrease.

Yesterday, there were more lumber contracts traded than there were total just five years ago. This tells us that an usually large number of lumber futures participants are placing bets. There were more participants willing to bet on lower lumber prices than higher lumber prices, which drove the price to a "limit down" state, halting further trades. I think that the large volume, coupled with the fact that it was “limit down” day, indicates that lumber prices will continue to fall. The total number of contacts being traded (bets being placed) is falling as well, indicating that fewer participants have an opinion about whether lumber will go up or down. Falling lumber prices make it more challenging for us, our suppliers and our customers. Buyers at each level who might buy think it is better to wait for even lower prices, less revenue is generated for the unit volume being sold and profits generated from those sales are less.

U. S. September New Construction

According to the latest new construction data from the U. S. Census Bureau http://www.census.gov/const/newresconst.pdf, the housing industry continued it's devastating downturn in September. Total permits fell to a rate of 786,000 and single family permits fell to 532,000 on a seasonally adjusted basis. This represents a decline from August of 8.3% (total) and 3.8% (S/F) respectively. As you can see from the chart above, all measures of housing still continue to be in a precipitous decline.
Building permits represent our future business, what this tells us is that we must work even harder to gain more market share in the near future.

Starts fell as well, with total starts decreasing 6.3% from August to a seasonally adjusted annual rate of 817,000.

The largest portion of housing construction is single family. Single family starts fell to 544,000, a decline of 12%. According to the historical data, this is only 21,000 seasonally adjusted annual starts above the low set in October of 1981. If our market area is any indication of where the national and regional data will be in October, or if the trend simply continues, we will set a new historical low for single family starts this year.