Fitch expects U.S. residential construction to stay at distressed levels into 2012, says fall in September building permit applications is sign of near-term weakness

Lorena Madrigal

CHICAGO , October 20, 2011 (press release) – Despite recent signs of stabilization in housing starts and new home sales data, Fitch Ratings expects U.S. residential construction activity to remain at distressed levels moving into 2012.

This morning's September housing starts release by the Commerce Department pointed to a modest increase in single-family home starts, but applications for building permits were down slightly versus August, suggesting near-term weakness in new construction activity. The rise in the annualized level of total housing starts to 658,000 in September, up 15% from August, reflects some strengthening from this summer's trough, but the biggest driver of monthly gains was a pick-up in multi-family starts, which grew by 51% on an annualized basis from August to September.

Separately, applications for new mortgages declined last week, and the National Association of Homebuilders' confidence index rose but remained at a distressed level. Taken together, recent data provide little support for the view that lower long-term interest rates are driving a material pick-up in the housing market.

New home demand remains weak in the face of high existing home inventory levels, continuing foreclosure pressure and a persistently weak employment picture. In light of the continuing imbalance in supply and demand, Fitch forecasts very modest growth of approximately 1% in U.S. home prices for 2012.

Although average 30-year mortgage rates have fallen to about 4%, near a 40-year low, new home buyer demand is still being depressed by poor jobs growth, tough credit standards applied by lenders and ample availability of competing home inventory.

Fitch expects new home sales to grow at a rate of 7% in 2012, off of a still-depressed 2011 base. Somewhat less competition from distressed home sales, fewer low-cost rental alternatives and historically low interest rates should contribute to the modest rise in single-family home sales next year.

For additional information on Fitch's outlook for housing and the U.S. homebuilding industry, see 'U.S. Homebuilding/Construction: The Chalk Line, Fall 2011', dated Oct. 14, 2011.

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