Residential Construction: Calling the Bottom

Housing starts in June rose to the highest level in 7 months, after falling for 3 1/2 years to the lowest levels since records were first kept in 1959. Residential construction as a percent of GDP also fell to its lowest levels ever. After languishing for 9 months, the stocks of major home builders are now beginning to rise. It would appear that we have finally seen the bottom in the housing construction market.

Comments

[Wesley Mouch:]

Good news, good news, good news indeed! The bottom is in on residential housing construction!

And if it holds, hiding our countries insolvency will be impossible. More supply is the last thing we need, and increasing it will move us farther down the price curve, dragging more existing homeowner's underwater. As a nation we cannot borrow what it will take to write-off the lender's losses on residential properties. Those homeowners that choose to stay in underwater properties will not be able to move to find what work is available, and will remain underemployed for the foreseeable future.

What economic signal are the builders not getting? Who is making these loans to the builders?

Jul 17 12:43 PM

[Houston:]

Got to agree with Wesley on most of what he said. Hopefully these starts are occuring in Austin and not Las Vegas. Builders will be adjusting to the market. Land is key. They will buy it cheaper and adjust the sales price down which will put new houses on the market for less than what some people will owe on their mortgages for similar used houses. That gap won't close for many years.

On the other hand. Without new starts...no new appliances and so forth. Sometimes a situation is so bad, none of the choices are real good.

Jul 17 02:02 PM

[Radardoc:]

First comment: Location - Where are they building? Local conditions may warrant building in isolated pockets.

Second comment: Insanity - If they are building them in my neck of the woods (So Cal), we will be reading of their demise as they discover they can't sell for what it cost to build them.

Jul 17 03:41 PM

[cameroni:]

That little tiny up-tick in housing starts after so many months of declines may look promising on a paper graph but I tell you it is only a seasonal (and mostly hopeful) change. Don't hang your investment hat on that small change just yet though. Housing starts will fall in late summer as usual and come falling back to earth in fall. Winter will be a bust like always.

Maybe next spring. Don't get your hopes up yet. It is still too early.

Jul 18 04:35 AM

[Old Trader:]

Builders build, because that's what builders do, although as pointed out above, more inventory is not called for. As also pointed out, location is key, so there may be pockets where inventory overhang is not as daunting.

Bloomberg TV had an interesting interview with a MD of a private equity distresssed real estate fund, yesterday, and he said that there are actually areas in SoCal (LA area) and west coast Fla. that are turning around. Miami, the NE states, Pacific Northwest, and the Midwest still have a way to go before bottoming, according to what he's seeing.

Jul 18 08:35 AM

[Andrew Eric...:]

Interesting notes worth diving into for housing construction starts, if you're looking to forecast where it's going in the future:
1. Starts are ramping up to an annual rate of 582,000 units after April's low of 479,000 units.
2. The first-time home buyer tax advantage as part of the stimulus package requires home foundations to be built by the end of this November. Many of the starts are directly attributed to this program, not a market recovery.
3. If the 582,000 units holds through the year, starts will still be down from the peak in 2005 of 2,068,300 units. At 582,000 units, we're down 71.86% from the peak year.
4. Prior to this current recession, the most recent lowest annual housing starts figure was in 1991 with a total of 1,013,900 units. Prior to that, the lowest level was in 1982 with a total of 1,062,200 units.
5. Housing starts traditionally grow quickly (usually over 10%) the first quarter out of a recession.

I would agree that one must be extremely cautious in housing construction today, as the first-time home buyer program is giving a bit of a push to housing starts that isn't warranted by what we would experience from the typcial end of the recession housing start push.

If the first-time home buyer program doesn't get renewed and we aren't out of the recession by the end of this year, we'll likely see future drops in housing starts that will continue to keep the US in a dismal (and depressing) housing start envrionment compared to the last 80 years.

Housing Starts Data Source: US Census Bureau

Jul 18 02:04 PM