Homebuilders received more unwelcome news on Friday, as a U.S. Department of Commerce report noted that privately owned housing starts in October were 14.6% below the revised estimate for September and 27.4% below the October 2005 rate. Single-family housing starts also plunged 15.9% below the prior-month rate.
The report also noted sharp decreases in building permits. Privately owned housing units authorized by building permits in October were 6.3% below the revised September rate and 28% below the October 2005 estimate.
Taking a look at regional data, the South and the Midwest saw the worst of it. New housing construction in the South dropped off 26.4% from September and the Midwest saw declines of 11.7%.
The report brought a further drag on the stock prices of most of the major U.S. homebuilders, which have already been battered over the past 16 months. Shares of DR Horton (NYSE: DHI), KB Home (NYSE: KBH), Toll Brothers (NYSE: TOL), and Lennar Corp. (NYSE: LEN) are all well off the two-year peaks they experienced in the summer of 2005. Putting things in perspective was Joel Naroff, chief economist at Naroff Economic Advisers. "A tornado hit the housing sector in October. Builders have seen the light from the housing market meltdown and are now moving as rapidly as possible to reduce supply," he noted.
While valuations are relatively cheap for most of the homebuilders, I don't feel inclined to go against the grain of the market in this sector. Despite solid job growth and favorable long-term interest rates, sales cancellations and inventories of unsold new homes at near-record levels will continue to pose major obstacles for the homebuilders. Declining new-home prices also pose additional concerns for potential investors.
Last month, the Commerce Department reported that the median price of a new home fell by the largest amount in 35 years. The median home price in September was $217,100, representing a 9.7% decline from September 2005. It was the steepest year-over-year decline since December 1970.
For those Fools looking to add real estate to their portfolios, I believe REITs will provide a good alternative to the homebuilders until new-housing construction trends rebound. Today's announcement that the private equity firm Blackstone Group has agreed to purchase Equity Office Properties for $19 billion is an indication that there is an ample amount of private equity capital to chase after commercial real estate. Friday's Commerce Department report clearly does not afford homebuilders the same level of optimism for capital chasing after new housing construction.
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Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
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