'Improved' Housing Starts May Impede Recovery

The US Census Bureau released August housing starts data this morning which showed a 598,000 (seasonally adjusted annualized rate) rate of starts. The August rate was 1.5% higher than July's 589,000 figure, but still 29.6% below the August 2008 rate of 849,000.

The current recession has decimated housing starts far more than has ever been witnessed during the modern era of data recording. Prior to the current state of malaise, analysts had viewed the 1,000,000/year rate as the level at which new starts could not remain below for any extended period of time.

After all, history has shown that whenever starts slip below 1 million, they do not remain so for long, and quickly spring upwards. With US starts below that threshold for the past 13 months however, that conventional wisdom has been shattered.

In order for a sustainable recovery in housing to occur, starts must remain at these depressed levels for at least another year. Unless builders plan on selling all newly constructed homes below their cost, they will not be able to compete with the massive foreclosure inventory that is bleeding onto the market.

The August numbers do not indicate that starts have raced ahead of a level conducive of a recovery, however, further "improvements" in the starts area will serve to hinder, rather than promote, a housing market recovery.

InfoNgen was used to research this article

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Comments

[RalphD:]

The most ridiculous discussion and conclusion I've seen in quite a while.

Sep 17 01:20 PM

[Mark Bern:]

There is probably nothing conclusive to be derived from small changes in housing starts. Housing starts do serve as an indication of growth in spending by construction firms, which does add something to the economy. However, the data points that really matter and can provide some insight as to the direction of the economy, and specifically the housing industry, are sales of new homes, sales of existing homes, inventory of new homes, and inventory of preexisting homes.

Unfortunately, many "analysts" (and I use that phrase or title very loosely here) make claims based upon small changes in one or two measurements of those data. This is also a fallacy, since if sales of new homes rises while existing home sales fall there is no real benefit overall. If inventory falls but is not accompanied by an even larger rise in inventory, it may only mean that as listings expire the sellers have given up or that other potential sellers are holding their properties off of the market for a stronger market.

Another problem I see is that too many pundits are ready to proclaim a recovery in housing after two or three months of rising sales figures occurring during the spring/summer months accompanied by government subsidies to drive sales higher. They also don't look at already depressed 2008 summer sales for comparison, which reduces the seasonality bias. If sales for the same month a year ago are higher than they are this year, then sales are still trending lower.

People are trying to make statistical data say things that, if interpreted correctly, it would not indicate. People with agendas should be allowed to publish data interpretation, IMHO.

BTW, I own close to 100 investment properties I need to sell and would like more than anything to see housing prices rise again. However, I am not blind to my desires.

Sep 17 02:10 PM

[Michael Clark:]

I think what he may have meant (it's dangerous to try to think for someone else) is that with millions of homes uninhabited (or in foreclosure), we DO NOT need more homes being built. Adding to the supply is not going to help the situation.

The idea that more activity is always positive is not always true.

Sep 17 03:41 PM

[CautiousInv...:]

I don't think we have a handle on how much real housing inventory there is because of the sclerotic foreclosure system and the bias of banks simply parking foreclosed homes on their balance sheets to delay the inevitable impairment(charge) to earnings.

If the population is expanding by 3 million people annually, the estimated need for additional housing........after the unknown inventory and vacancies is sopped up......could be in 1 million range and this would be total housing including multifamily.

In looking at the chart it looks like we overbuilt to the tune of 9 million units........based on average production of 1.5 million units/year for 18 years........and to the extent this is true we could sitting on a pile of housing that is not needed.

This overlooks construction of second homes and replacement of units removed from the housing stock, but I would be willing to venture we are sitting on at least 5 million or more "extra" housing units above and beyond normal inventory and vacancies.

If its anywhere close to this the industry will be in a state of draught for the foreseeable future until a semblance of equilibrium is restored.

Sep 17 04:22 PM

[Gary A:]

Housing starts shmousing starts. The real issue is that option arms start resetting in September, this month! People will have to pay 5 to 10 times what they normally pay in a mortgage. This will mean instant non payment. These reset over the next few years and will bloat inventory and be more hurtful than subprime.

Sep 17 06:49 PM

[Carneades:]

Thanks for the clarification Michael.

The article wasn't intended to forecast the future direction of housing starts, but rather to make the point that more isn't always better.

To take my argument to the extreme, I'd say that the best thing that could possibly happen to the housing market would be an instant halt to any and all construction of new dwelling units. We don't need more inventory, even if it is being created at a historically low rate.


On Sep 17 03:41 PM Michael Clark wrote:

> I think what he may have meant (it's dangerous to try to think for
> someone else) is that with millions of homes uninhabited (or in foreclosure),
> we DO NOT need more homes being built. Adding to the supply is not
> going to help the situation.
>
> The idea that more activity is always positive is not always true.

Sep 18 11:52 AM