October Housing Starts Plunge as Tax Credit Expires

Housing starts dropped 10.6% in October but this does not change the housing outlook for next year. A fallback was expected after the expiration of the $8,000 first time buyer tax credit. This was exactly what happened to auto sales after the end of “cash for clunkers”. That post-subsidy dip lasted one month and then was largely reversed the following month. Expect the same for housing starts where the rebound will be boosted by the recent extension and expansion of the down-payment tax credit. 
The post subsidy dip in housing starts was exaggerated by a 35% drop in multi family starts to the lowest level in many decades. Multi family starts are very volatile from month to month. The very weak total reported for October is well below the current trend. Building permits fell only 4% in October which has to be interpreted as recognition by homebuilders that October starts suffered from buying ahead spurred by the original tax credit. Note that October multi family permits were almost twice as high as October multi family starts.
The second tax credit for home buyers includes existing homeowners and prospective buyers with incomes up to $225,000. It will have a much bigger impact on housing starts than the original, more limited, tax credit. Most of the added starts will come in the winter quarter. Existing homeowners were not expecting the credit and will need several months to take advantage of it, including selling their current home.
The new credit will further cut the average size and cost of new homes. Obviously, the credit will be more significant to buyers of a $150,000 home than to buyers of a $600,000 home. Through January, the new credit will be claimed by a relatively large share of first time buyers who are able to act quickly. Very few custom home starts will be spurred by the new credit because of the long design and building process for these homes.
Winter is the seasonal low period for housing starts. A burst of credit spurred starts during the winter presents an unusual seasonal adjustment problem. If the usual, seasonal factors are used, expect sales to balloon much higher in the winter and then collapse briefly in the spring. Reported seasonally adjusted housing starts in the winter months are frequently revised substantially as seasonal factors are updated for weather conditions. These revisions could be larger in 2010.