Posted by Marcelo Perez

New residential construction ground to a halt in December, as the nation’s homebuilders were hit by weak demand, an oversupply of homes, and a dehabilitating credit crunch, all in one. Housing starts for the month of December plunged another 15.5%, to a seasonally-adjusted annual rate of 550,000, the lowest level on record (records have been kept since 1959). The number was completely off the charts, as economists were anticipating a decline to 600,000 annualized units. In all of 2008, housing starts fell by 33%, to 904,000, the slowest pace on record (in the last 50 years) for a full year. For some perspective: In all of 2007, 1.355 million homes were started. In 2006, 1.8 million homes were started.

Building permits, an indicator of future construction, also fell off a cliff, by 10.7, to a record low of 549,000 annualized units. Permits for single-family homes, considered by many analysts as the most important figure in the report, fell 12.3% to 363,000, also a record low. Building permits are down 36% in the past year.

Via MarketWatch:

The large declines in the past few months could be good news for the economy, on the principle that when you are in a hole, the first thing to do is to stop digging, said UBS economists Maury Harris and Jim O’Sullivan ahead of the report. “The more starts plunge now, the quicker home inventories are likely to be reduced, potentially limiting the ultimate drop in home prices (the main cause of the financial crisis),” they wrote.

New construction on single-family homes fell by 13.5% for the month, to an annualized rate of 398,000, another record low.

Via FT Advisors:

Home builders may continue to reduce starts a bit in the months ahead, but there is just not that much room left for major declines. Back in 2005, single-family starts peaked at a 1.75 million annual rate, of which 1.4 million were built for sale (as opposed to knockdowns, for example). Now, single-family starts are running at a [398,000] annual rate with only about 280,000 being built for sale. This is not nearly enough to meet the demand for new homes, which is still running at about 400,000 per year. So inventories will continue to fall quickly. In addition, from a long-term perspective, with new home sales eventually returning to an average annual pace of 900,000+ (due to population growth and a taste for new homes), we expect building activity to rebound quickly in 2010 once inventory levels are back to normal.

Construction on buildings with 5 units or more, one of the few positives in the report for the past few months, also fell, by 17.1%, in a sign that rental properties may not be in demand anymore.

Regionally, total starts gained 12.7% in the Northeast and fell 24.5% in the Midwest. Starts in the South and the West, the hotbeds for the housing over-exuberance that has occurred, fell 22.2% and 2.2%, respectively.

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