Housing Starts: Best and Worst Years

Recent news out of the U.S. Census Bureau seemed anything but positive—housing starts, a vital indicator of the state of the economy, slipped to a six-year low in October. The stock market dipped on the news, and economists handed in their gloomy predictions: This was the beginning of a long overdue correction that could continue well into 2007.

History, however, demonstrates that times have been worse. Total starts of construction of privately owned homes dropped to a seasonally adjusted annual rate of 1.486 million in October, 2006, down 14.6% from the revised September rate of 1.74 million. As bad as that sounds, it was nowhere near the levels of the worst months for housing starts in the past 47 years. The historical monthly median—based on data dating back to 1959—is 1.529 million, just 2.8% higher than the most recent number.

Moreover, the past indicates that this downturn in home construction is, for lack of a better word, constructive. "It's inevitable and good," says David Seiders, chief economist of the National Association of Home Builders. "It would have been better not to have the binge, but we did, and now [homebuilders] are doing exactly what they should be doing."

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Existing Home Prices Post a 3.5% Drop

According to the National Association of Realtors, with so many For Sale signs hanging in front yards, home prices — which posted a record 3.5% drop last month — are likely to fall through the end of the year.

The median existing home price fell in October for the third month in the row to $221,000 as more sellers were forced to lower their asking prices. Those price cuts, coupled with a dip in mortgage rates, appear to be making a difference as home sales ended a six-month losing streak and unexpectedly edged up 0.5% in October.

With a 7.4-month supply of homes for sale, "sellers will have to overcome their state of denial and start dropping prices even more to clear this market," says Joel Naroff, chief economist of Naroff Economic Advisors. "And once that happens, we will then have to convince buyers that prices have stopped falling. We are a long way from that point."

Buyers were more interested in buying single-family homes than condos last month.

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Buying Home in the U.S. by Foreigners

Recent law changes grant non-permanent resident aliens most of the same purchase and home-financing opportunities that American citizens have.

When buying a house, foreigners don't need to worry anymore about their good employment and credit records becoming lost in translation since many major U.S. lenders now use credit-reporting agencies that have reciprocal agreements with European countries and can use a simple currency conversion table to track your current income and assets.

However, a foreigner needs to come up with a down payment of 20 percent to 25 percent of the purchase price, depending on the rules of the lender, which is a little higher than what most Americans pay. Nevertheless, the home-buying process in the U.S. is relatively simple and less bureaucratic for a foreigner than it would be in most countries and there are hundreds of web sites where you can view American properties online from the comfort of your European home to facilitate your search.

Read more about what foreigner should know when buying a house in the U.S. …

New Home Building Activity Falling

New home-building activity in the U.S. resumed its decline in October, tumbling to its lowest level in six years as builders dealt with bloated inventories of unsold property.

According to the Commerce Department, housing starts decreased by 14.6% to a seasonally adjusted 1.486 million annual rate. Building permits, an indicator of future building activity, fell a ninth consecutive time.

The government also lowered its original estimate for September starts, a number some economists considered a fluke. Construction rose 4.9% to 1.740 million in September, revised from an originally reported 5.9% climb to 1.772 million. Starts fell 5.7% in August, 4% during July, and 6.1% in June. Construction rose 6.6% in May.

Economists had expected a less-severe drop in October. The median estimate of 22 economists surveyed by Dow Jones Newswires was a 5.6% fall to a 1.672 million annual rate. The 14.6% decline was the largest since 16.1% in March 2005, and it carried starts to their lowest since 1.463 million in July 2000.

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The House of Your Dreams

Before deciding which house to buy, think about your lifestyle, your current and anticipated housing needs, and your budget. Finding the right house involves striking a balance between your wish list and the reality of the housing market.

Your Wish List

When creating your wish list, take a look at your lifestyle.  For example, if you love to cook, you'll want a well-equipped kitchen.  If you love to garden, you'll want a yard.  If you want to work at home, you may want a room for a separate library or home office.  If you have several cars, you may require a garage or parking spaces.

Write down on paper all the things you and your co-purchaser, if there is one, would love to have in your home.  You can let your imagination take over, but realize that you will have to cut the list back later.

As you think about your housing needs, it's important to consider how long you may live in your home.  If you are newly married, you might not be concerned with a school district right now.  But you could be in several years.  Will you move then — or is the house you are looking for now is in a neighborhood where good schools are available?  If you have aging parents, might they need to live with you in the near future?  If so, you may want to look at homes that offer living arrangements for them as well as you.  So, when preparing your wish list, factor in both your current housing needs and what you may anticipate a few years from now.