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The Housing Market Is Plunging. Is It Time to Panic?

By John Maxfield – Feb 23, 2014 at 10:25AM

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New data suggests that the housing market is falling out of bed. Why are so few new homes being constructed?

The bottom just dropped out of the housing market. Or, at least, that's what a report released this week by the government suggests.

According to the Commerce Department, the number of housing starts -- new residential construction projects commenced during the month -- plummeted by 16% in January compared to December.

It was the worst monthly decline in almost three years. The only recent month that even comes close was April of last year, when housing starts fell by 15%.

The general opinion is that unusually cold and snowy weather caused the dramatic decline, as many of the East Coast's biggest cities have been bombarded by snowstorms since the beginning of the year.

According to the Associated Press, "U.S. home construction fell in January for a second month, but the weakness in both months reflected severe winter weather in many parts of the country."

Yet, this appears to tell only half of the story, as housing starts in the hardest-hit region, the Northeast, actually increased by 62% compared to December. It was the Midwest that suffered the biggest blow, where new home construction fell by a staggering 68%.

"While we believe the weather did impact construction activity, we think this is just part of the story, as the new construction slowdown was more broad-based," an economist at BNP Paribas wrote in a note to clients.

This follows on the heels of news that sentiment among homebuilders has also recently slipped.

A confidence index published by the National Association of Home Builders yesterday suggests that the home construction industry views conditions as poor rather than good. The reading of 46 for the current month was 17% below the reading in January -- a figure below 50 is indicative of pessimism.

Weather was similarly given as an explanation.

"The weather was clearly a major factor, although this report will keep alive concerns in the markets that the weakening in the data recently is not just due to weather," Jim O'Sullivan, chief U.S. economist of High Frequency Economics, told USA TODAY.

Despite the news, shares of homebuilders were trading that afternoon. D.R. Horton (DHI -0.69%), the nation's largest builder, was up by 0.82% shortly after the report, while PulteGroup (PHM -1.57%) was higher by 0.25%.

Executives at both companies have sounded guardedly optimistic in recent interactions with analysts.

At the end of last month, D.R. Horton's chief executive officer, Donald Tomnitz, noted that, "Housing market conditions continue to improve across most of our operating markets and we are optimistic about the upcoming spring selling season."

The homebuilding giant reported a quarterly increase of 4% in net sales orders for the final three months of last year.

PulteGroup's chairman and CEO Richard Dugas was somewhat more cautious, saying that "we still believe that the ultimate shape of the housing demand curve going forward will be affected by broader economic conditions. More jobs and ideally better-paying jobs will be critical in driving housing demand to peak levels."

Dugas' reservations are likely tied to PulteGroup's performance. Between October and December, the company's net new orders dropped by 18% from the prior year, thanks in large part to its reduced community count.

John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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