Has Housing Reached Bottom?

I must confess that I find Jim Cramer entertaining and, on occasion, even illuminating. The key is to Tivo his show and fast forward through the less-than-illuminating parts. That can trim an hour show down to ten minutes or less.

The highlight of Tuesday night’s show was Cramer’s declaration that the housing market had reached bottom. His evidence? Tuesday’s data on housing starts, which came in stronger than expected. That prompted me to take a closer look at the data. Here’s a chart of single-family housing starts since 1970 (when the data begin):

As the chart shows, Cramer may be on to something, at least as far as starts are concerned. Single-family starts bounced around the 360,000 level (at a seasonally-adjusted annual rate) in January through March, rose to 373,000 in April, and hit 401,000 in May. It’s been more than two years since we’ve seen starts increase that much.

That’s good news, but I think we should still expect further pain in housing.

Why? Because starts are only part of the housing story:

• As Calculated Risk has emphasized, a bottom in housing starts does not imply a bottom in housing prices. Indeed, history suggests that house prices may decline for months or even years after housing starts bottom.

• In the near term, furthermore, the macroeconomic impact of housing depends not on the number of houses started, but on the total number under construction. That number is still falling:

Those declines imply that housing will continue to drag on the economy for at least a few months, even if starts continue to show new life.

Comments

[Jimmy K:]

Please go on Realtor.com; do a home search anywhere (say Charlotte, NC) and look at 25 homes. You'll find approx 70% are vacant... how could housing have reached a bottom?

Jun 17 07:15 AM

[Michael Shu...:]

A housng bottom can only occur when foreclosures abate -- and foreclosures will peak in 2012. The math is simple -- peal mortgage resets will occur in July 2011; peak defaults three months later; please foreclosures three months after that; peak listings of foreclosed homes three months after that. The math is simple -- you actually back this stuff. Also, historically, home builder stocks bottom at a million starts -- and when the Street sees what I see in foreclosures and home prices and inventory - lions an tigers and bears, oh my - they will find the current and projected levels of housing starts more of a reason to short the builders rather than buy them. In my newsletter I recently shorted the XHB -- is it technically rolling over and the Street is beginning to wake up to housing reality.

Jun 17 07:16 AM

[jeandit75:]

What about the inventory of houses? No analysis is complete without the inventory. We know a round of massive foreclosure is set to happen given the resets, then we know that unemployment is increasing still, then we know we are probably in a growthless recovery (if any), etc. I think the simple conclusion is housing has not bottomed yet and will not before long. The Case Shiller index of home prices is only down to 2002 or 2003 whereas the S&P last March was back to 1997 level. Given the bubble we have gone through in housing, I don't see why the bursting of it would only get us back to 2002-2003. Sorry but the pain is not over yet.

Jun 17 07:17 AM

[t-bird:]

Good article...With the latest increase in housing starts; would like to find out how many of these starts are speculation construction versus sold (custom) construction. My guess would be more than 95% would be sold construction as any builder in his sane mind would not start a speck project in today's environment. F.D. I am in the real estate business and the contractors I associate with are only starting custom projects, no specks!

Jun 17 08:38 AM

[kebu77:]

Starts/permits are a very lagging indicator. Look at completions, which have been running 150-200k over starts/permits for at least two years, some months over 300k (a surplus of completions at around 2 million in that time). Consider that if a builder "starts" 1000 homes and runs into a credit crunch, or starts 3 model homes in a 100 unit townhouse devt: how much time passes until all the units are completed? Average lag time has to be several months.

Last month the surplus of completions over starts/permits was around 280k. It will be several months until completions begin to drop far enough to match the lower starts/permits figures.

This then may be one indicator of a housing bottom.

Jun 17 12:10 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