Still Too Early to Cheer Housing Starts

We recently learned that housing starts "beat" expectations in November, rising 3.9% over the previous month. I am not a housing expert, but I thought increasing supply in an already oversaturated market with depressed demand is a bad thing. However, a recent Bloomberg article discusses why more homebuilding is a positive for the economy as it would add a significant amount of jobs to the economy. While this may be true, I believe improvement would be offset by a continuing decline in home prices.

Home prices still falling
Despite the dubious calls that say housing has bottomed or that real estate is the buy of the decade, the fact of the matter is that home prices are still falling in most areas of the country. The most recent Standard & Poor's Case-Shiller composite home price index showed home prices fell in all 20 cities that the index tracks in October from the previous month. This was even worse than September, when only 18 of 20 metro areas posted declines from the previous reading.  In October, the index fell by 1.3% from September, which is good for 0.8% decline year-over-year. That is pretty substantial, folks, especially in the face of the declines that have already occurred.

Zillow Real Estate Research estimates that by the end of the year, home prices in the United States might fall by more than $1.7 trillion, which is also significantly higher than the $1 trillion drop last year.

Another huge hurdle for the industry is the still-increasing number of foreclosures that add to the housing inventory. In fact, in the third quarter, more than 288,000 homes were foreclosed on -- a record high that was an increase of 7% over the previous three months and 22% year-over-year increase. The number of foreclosures in the fourth quarter is expected to decline as a result of banks like Bank of America (NYSE: BAC), JP Morgan (NYSE: JPM), and PNC Bank (NYSE: PNC) placing a temporary moratorium on foreclosures because of the Robo-signer fiasco. However, the banks' issues do not change the fact that many homeowners are still underwater and at risk of foreclosure.

Conflicting views on housing
Some turned more bullish on housing -- and the homebuilders in particular -- when Toll Brothers (NYSE: TOL) recently reported a profit after 11 straight quarterly losses, even though the profit was primarily because of tax benefits from a reversal of a valuation allowance. Nonetheless, the company's CEO said he expects to see improvement in the market in 2011 and that 2012 will be a "big year."

We also recently heard from another good indicator of the housing market: home improvement retailers Home Depot (NYSE: HD) and Lowe's (NYSE: LOW). While both companies posted decent quarters thanks to cost-cutting and operational efficiencies, neither of their CEOs was bullish on the housing market and said consumers have been slow to spend money on their houses.

Lowe's CEO Robert Niblock does not yet see any upside in the housing market and believes that home prices will continue to fall next year.

No home improvement
The number of new homes being built does remain at historically low levels, which I believe is a good thing as the data I reference shows a housing market in which stabilization has still not occurred and home prices that on average are not poised to rise in the near future.

While opinions may differ, I believe the time is still not right to cheer an increase in housing starts. Perhaps the headline this month should read that housing starts "missed" expectations. At least then I could get more bullish on the housing sector.