A Pick Up in Housing Starts Will Only Prolong the Housing Recession

From the Associated Press this morning:

Construction of new homes jumped in May by the largest amount in three months, an encouraging sign that the nation’s deep housing recession was beginning to bottom out. The Commerce Department said Tuesday that construction of new homes and apartments jumped 17.2 percent last month to a seasonally adjusted annual rate of 532,000 units. That was better than the 500,000-unit pace that economists had expected and came after construction fell in April to a record low of 454,000 units. In another encouraging sign, applications for building permits, seen as a good indicator of future activity, rose 4 percent in May to an annual rate of 518,000 units. The better-than-expected rebound in construction was the latest sign that the prolonged slump in housing is coming to an end, which would be good news for the broader economy.

Pretty lousy analysis if you ask me. It is true that more construction will show up in GDP calculations as so-called “economic growth” but the idea that growth in housing starts is good for the housing market and means the housing recession is coming to an end is completely wrong.

In case the AP hasn’t noticed, housing prices are cratering due to a supply-demand imbalance. When supply exceeds demand, prices drop (economics 101). It is widely believed (and I agree) that a bottom in housing prices (and therefore an end to the housing recession) is needed before the U.S. economy can really begin a sustainable recovery (such an event would boost consumer confidence and spending, and help the banks feel better about extending credit). In order for home prices to stabilize, we need the supply-demand picture to balance out.

How will supply and demand meet if we build more supply when the problem has been (and continues to be) an excess supply of unsold homes? They won’t, which is why a pick up in housing starts will only serve to prolong the housing recession, not help to curb it. Hopefully the pick up in May is a one month phenomenon.

Comments

[Mad Hedge F...:]

For sure. Iam more convinced than ever that real estate has another 25% to fall, and best case, it is dead money for another five to ten years. The New York Times produced some insightful data on inflation adjusted home prices for the last120 years, which baselines at a $100,000 for a single family home in 1890. Few people realize how superheated the recent real estate bubble really got. Past bubbles very consistently peaked at $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000 in 2005, almost double the previous record highs. And while we have dropped 34% since then, to $135,000, we haven't even fallen tothe past all time highs yet. If you look at historical lows, my call for a further 25% slump looks positively bullish. We saw lows consistently around$66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000 in 1976,1983, and 1996. These figures suggest the best case low is down a further 28%,and the worst case is down another 51%. I think I'll go find something else to trade.

Jun 17 06:05 AM

[Gremalin:]

Need to read the details. The big imbalance creating all the problems we have now is driven by single family inventory. The increase in starts was overwhelmingly due to multi family starts.

Jun 17 08:41 AM

[HardwoodFlo...:]

Actually the faulty thinking here is in your analysis.

Starts are down 75% from the 1.5 million units that are needed to cover single family home formations. So your right there is no good news here. But the 500K are real buyers, with real construction loans, those houses have people that are filling them. The real problem is the sales number. Right now some 3.5-4 million houses will be sold this year that is 50% below normal levels. What that means is that there is no buyer seller relationship. People do not want to sell into this down market subsequently they are not then turned into buyers. So what you have is a relationship that lacks the fundamentals of a housing turn around.

These start numbers don't equal a pimple on an elephants ass. They are totally insignificant. The fact they are up 17% means nothing. There is 300% more to go to get back to sustainable.

So what does this all mean. This means that inventory numbers won't come down much more- they are about 4 million with another 2-3 million in shadow and another 1 million probably coming in Alt-A arm resets. Unless people start seeing a bottom in housing those numbers won't improve. So, it will be hard to work off the inventory as along sales are relegated to two places- 1) new home owners 2) distressed sales.

The biggest problem with your article is that you are missing the MACRO picture.

Jun 17 04:40 PM

[cant pay mo...:]

There are some hints that we could hit a second credit crisis. Some early warning signs of another global financial crisis include surging government bond yields, a slumping dollar, and the end of the bear market rally in the U.S.

good articles... kl.am/tsc

Jun 17 09:52 PM