Economists expected a rebound in housing starts for February because of worse-than-usual weather conditions in January, but building permits were lower than expected for single-family homes, shifting emphasis to multi-family apartments and condos.

The good news was that housing starts rose by nine percent to an annual rate of 1.53 million in February, up from the revised 1.40 million homes pace set in January. Starts are calculated by a monthly Survey of Construction based on samples.

But builders sensed further weakness in housing, and building permits declined 2.5 percent to an annual rate of 1.53 million from January's higher annual pace of 1.57 million. Building permits are considered less volatile than starts because weather plays an important role in building. They are calculated by The Building Permits Survey which produces estimates of the permits for new housing units monthly. Permits in February were at a nine-year low.

New home sales made news in January by plummeting 16.6 percent, according to the Commerce Department, the slowest rate of sales in 13 years. Since the red-hot summer of 2005, new home sales have fallen by nearly one-third, which is impacting all verticals related to it, including existing home prices and home improvement.

But there are some advantages for homebuyers that didn't exist a year ago such as lower mortgage interest rates and higher inventories to choose from, sweetened with additional incentives:

• Average 30-year fixed rates are hovering today at 6.14 percent. With fixed mortgage rates sharply lower than summer 2006, when rates nearly approached 7 percent, homebuyers have the opportunity to get into a home without as much risk, if they can qualify.

• Demand dictates production in new home building. If demand throttles back, there are fewer permits applied for and fewer homes constructed and completed. Permits for single-family homes were down while permits for condos and apartments were up.

New home sales reached a record in 2005 of 1.72 million units. As early as September 2006, when the National Association of Home Builders published it's Housing Economics.com Long-Term Forecast, the NAHB found that the shift in demand for housing from 2000 to 2005 "went beyond the shares implied by demographics, and was largely powered by changes in actual or anticipated costs.

"The overall cost of owning a single-family home include the cost of financing, maintenance, property tax, and foregone income on alternative investments, offset by capital gains from appreciation and reduced income tax burdens," says the forecast.

Housing had a tailwind from lower mortgage interest rates, alternative investments were producing, and housing appreciation rose, but now high costs are inhibiting buyers from coming to the table.

The NAHB knows that in the years ahead, "mortgage rates will be higher, while the unsustainable rate of appreciation in home prices will move lower. Home ownership will still attract most households, but it will no longer appear to be a free lunch."

The number of new conventional houses built during the decade between 2006 and 2015 will exceed the number produced in any previous decade, says the home builder organization. Yet, the average number of housing starts will be high relative to multi-year averages in the past, with not one year in the forecast expected to exceed the record number of homes built in 2005.

One reason there will be fewer single-family homes started is competition from condos, townhomes and apartments that provide alternative forms of homeownership for the growing number of singles, couples, and non-traditional families that are increasing in number as heads of households.

Home prices and home building costs have increased faster than overall inflation, along with the size of homes, which means that new homes built in the future will be likely feature-rich, but smaller. Already, homes are smaller than they were only two years ago.

The average floor area in a newly built home in 2005 reached an all-time high of 2,434 square feet -- up from an average 2,349 square feet in 2004 and just 1,645 square feet in 1975.

For homebuyers who want to buy big, the time is now. With construction costs going up over 8 percent annually, new homes in the future are likely to stay the same size, and will be increasingly two-story over one-story, or smaller by about 100 square feet, as in condos or townhomes. The NAHB's projection for the year 2015 is that a typical construction will be a 2,330-square-foot, two-story home with 2.5 to 3.5 bathrooms and 4 bedrooms. In order to control ownership costs, homes will have to be increasingly "green."

While the NAHB expects home sizes to remain large, the introduction of the Echo Boomer as homebuyers will reignite the starter home boom, as the Baby Boomers did in the 1970s.

Published: March 21, 2007

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