Ian Shepherdson Starts Quotations

One steep drop in housing starts does not make a downward trend, especially in a month which was very wet in the West and very cold in the Northeast. Still, the data are consistent with other signs of a softening housing market, most notably the drop in homebuilders' confidence. What really matters, though, is whether sales will fall fast enough to turn a softening into a collapse.

No doubt these numbers will be taken by the market as a clear sign of a softening housing market and, by implication, an indication that higher interest rates are biting. We are much more skeptical: housing starts lag home sales, which have been depressed in recent months more by lack of inventory than by higher interest rates.

Over the next few months we expect starts to strengthen as reconstruction begins on the Gulf Coast - the rise in permits may be an early sign - but elsewhere starts still need to lag sales. Demand is still huge but there are too many new homes for sale.

Our view is that home sales will slide through the summer, dragging housing starts down into the fall. But this is still no more than a forecast; mortgage applications are still very strong.

We think there is a good chance that home sales recover, or at worst stabilize, over the next few months. The starts data are potentially seriously misleading.

Doubtless these numbers will be followed by a rash of commentary to the effect that rumors of the death of the housing market are greatly exaggerated. This would be the wrong conclusion to draw. It is not possible for sales to trend down and starts to trend up.

By early next year we expect starts to have begun to decline, though activity can probably remain close to current levels for another couple of months,