The Upside of Low Housing Starts

I'm a little bit confused about all the pessimism surrounding today's housing starts figures. Yes, they're low - but remember we're talking about starts here: people and businesses brave or foolhardy enough to start building brand-new homes in an economic climate of steadily-falling property prices, in the face of the existence of a huge glut of already-built unsold homes on the market. Yet the number of homes getting started in December alone was over 1 million, on an annualized basis.

The Commerce Department doesn't release raw numbers for this series, so it's unclear how many actual homes got started in December. But we were told that the final-year number for 2007 as a whole came in at 1.35 million - which means that December (seasonally adjusted) came in at about 75% of the average for the year as a whole.

Atop most minds right now is the risk - and possible severity - of a 2008 recession. Housing construction is a significant component of GDP, and scaling back will not help the broader economy. But continuing to build in the face of the present housing overhang would only serve to weaken house prices further, which would hardly help the economy in the longer term.

It seems to me that builders are sensible and even bordering on the optimistic here. And anybody worried about plunging house prices should be relieved that the number of new homes coming onto the market is going to be relatively low in 2008.

Comments

[Clay Kime:]

Felix:

Thanks for your balanced observation. Finally, we have a rational comment on a housing news report at Seeking Alpha; One that has a view of the forest and not simply one's own tree.


Clay

2008 Jan 17 04:36 PM

[jim s.:]

I agree that another steep drop off in housing starts is sensible and necessary but lets remember that homebuilders make their living building homes. If the homes that they're able to build are selling for less, that doesn't bode too well for their profitability. The question is how many of them can sit on their hands for a year or two or more without the creditors knocking on their door.

While one can look at the starts and permits numbers and say they're an indicator the builders are doing the rational thing, had the numbers shot up instead I think homebuilder stocks would have shot up too.

2008 Jan 18 08:44 AM