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Home Builders’ Index Falls to 16-year Low

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By Rex Nutting, MarketWatch

RISMEDIA, June 19, 2007-(MarketWatch)-The outlook for U.S. home building is the worst in 16 years, the National Association of Home Builders reported Monday. The builders’ housing market index fell by two points to 28 in June, the lowest since February 1991.

The market probably won’t turn around until next year, said David Seiders, chief economist for the builders. “We expect housing to exert a drag on economic growth during the balance of 2007,” Seiders said in a press release.

The decline was in line with expectations of economists surveyed by MarketWatch.

At 28, the index shows that fewer than one-third of builders think the housing market is good or fair. Builders are concerned about high levels of unsold homes, rising mortgage rates and the continuing “crisis” in the subprime mortgage segment, the industry trade group said.

After rebounding earlier in the year as favorable weather boosted sales and construction, the builders have grown increasingly pessimistic in recent months as lenders began rejecting more borrowers, and delinquencies and foreclosures mounted. The index has fallen 11 points from 39 in February to 28 in June.

The index was at 42 a year ago and peaked at 72 two years ago.

The report comes a day ahead of the government’s data on housing starts and building permits for May. Economists surveyed by MarketWatch are forecasting a 4% drop in starts to a seasonally adjusted annual rate of 1.46 million, down 36% from the peak. Meanwhile permits are expected to be unchanged at 1.46 million, down 35% from the peak.

All three components of the housing index fell in June. The index for single-family home sales dropped from 31 to 29, also the lowest since 1991. The index for expected sales fell by two points to 39, the lowest since September. The index for buyers’ traffic dropped by one point to 21, the lowest since January 1991.

Regionally, the index fell in the three most important areas, and rose in the tiny Northeast market. The index fell one point to 32 in the South, fell by three points to 19 in the Midwest and fell by five points in the West to 27. The index rose by three points in the Northeast to 35.

The builders’ group left little reason to hope for a quick turnaround.

“Builders continue to report serious impacts of tighter lending standards on current home sales as well as cancellations, and they continue to trim prices and offer a variety of nonprice incentives to work down sizeable inventory positions,” said NAHB President Brian Catalde, a home builder from El Segundo, Calif.

“It’s clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have moved up considerably during the past month along with long-term Treasury rates,” Seiders said. “Home sales most likely will erode somewhat further in the months ahead and improvements in housing starts probably will not be recorded until early next year.”
After the late 1980s-early 1990s housing slump, it took 17 years for annual housing starts to exceed the 1986 peak of 1.81 million.

Rex Nutting is Washington bureau chief of MarketWatch.

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