Housing Starts? Stabilize THIS!

So much for that bottom:

Housing Starts plummeted today to the lowest level in 6 years, as builders continue to work out from under a massively bloated inventory of unsold property.

September starts were also revised downwards by 16%, from 5.9 to 4.9%.

The WSJ observed:

"The slowdown in housing this year stands in stark
contrast to the past five years, when the lowest mortgage rates in four
decades had powered a housing boom that pushed sales of both new and
existing homes to five consecutive records.

In a sign that starts will likely continue to fall,
October building permits dropped 6.3% to an annual rate of 1.535
million; the last month permits rose was January. Economists expected
permits would be up by 0.1% to 1.640 million. Permits decreased a
revised 5.2% last month to 1.638 million, compared with an earlier
estimated 6.3% drop to 1.619 million.

The housing weakness trimmed a full percentage point off economic
growth in the July-September quarter, when the economy expanded at a
tepid 1.6% rate. Housing is expected to continue acting as a drag over
the next year but analysts believe the adverse effects of falling sales
and construction cutbacks will not be enough to pull the country into a

The October 06 Housing Starts were the weakest
since July 2000, with Starts down 27% from the same period a year ago.

At present, the Housing situation will exert a much greater drag on Q4 GDP — even more of a drag than the negative 1.1% of Q3.

Bloomberg quoted Phillip Neuhart, an economist at Wachovia, who said: "This is a shocking number. The market is going to remain weak well into next year.”






New Residential Construction
Census Bureau

New Home-Building Activity Falls to Lowest Level in 6 Years
WSJ, November 17, 2006 9:17 a.m.

U.S. October Housing Starts Drop to Six-Year Low
Joe Richter
Bloomberg, Nov. 17

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What's been said:

Discussions found on the web:
  1. James Bednar commented on Nov 17

    Housing is so 2003. How ’bout that NMX.. :)


  2. Cherry commented on Nov 17

    I called that last month.

  3. anderl commented on Nov 17

    A housing bottom will be found when home builders start imploding. The majority of them have not learned from the other big cyclical industry (oil) that when times are fat to hold on to that cash and not spend it like the market for your commodity will go on forever. Many major oils have not deeply invested their cash positions in new production. that keeps prices stable.

    Home builders were increasing starts well into the fallout of demand and prices. Now they are cutting back after the fact but it is alraedy too late. The cost of complting the existing starts plus the lack of future revenue is going to bite them and that is why their stock prices have plummeted. Its taken a bite out of their balance sheets.

    The housing market may be stable when it comes to prices on existing properties, but not stable for the building industry. I’d say at the most existing home prices could fall another 10-15% from here going into 2008 and a long flat to rising trend for 3-5 after that.

  4. joe commented on Nov 17

    If fixed residential construction was down 17.4% in Q3, what do you think it’s going to be in Q4 with starts plummeting? How in the world is GDP going to be the “consensus” 2.5% when we know the absurd auto production number from Q3 will reverse and residential construction will be down huge again? I’m in Roubini’s camp, we’re looking at 0-1% in Q4 and then as the lagged effect on consumer spending starts kicking in next year, outright recession.

  5. PW commented on Nov 17

    Residential completions lag starts about 6-9 months. Since residential construction peaked early 2006, and has since dropped off a cliff, expect residential construction employment to drop like a rock in January or February 2007.

  6. rjf commented on Nov 17

    Time for the Conference Board to drop permits from their index of leading indicators. Plunging permits and a 50bips inversion of the yield curve is too much dour news to bear.

  7. GerryL commented on Nov 17

    I just saw David Lereah on CNBC and even he was surprised by the starts number. He looked rather pale. It was interesting to see the NAR’s senior cheerleader, I mean senior economist talking very negatively about the market.

  8. Mr. Beach commented on Nov 17

    Alright folks — rumor about hedge fund trouble and the dollar is crossing the wires. Anyone have more news?

  9. ari5000 commented on Nov 17

    But the CONSUMER can never die.

    They’ll find a way to buy all those houses, Barry, they will. If we just dig down deep and give it the ol’ college try — we can do it. We’re Americans, dammit. If we can’t buy 1000s of houses no one wants — what good is it all?

    We’re Americans, Barry. We spend money we don’t have and we’re going to throw this housing recession out on its ass.

    The CONSUMER will never stop spending. Never — not until they throw us in jail for failure to pay. Then we might stop. Just a little.

  10. vfsv commented on Nov 17

    Speaking of over-supply, Santa Clara Co. shows the following thru Sept’06:

    Homes Sold: 1192
    y-o-y volume: -32.2%
    New permits last 12 mo.s: 5,358
    = 4.5 Mo.s’ Supply! ====^^^
    New permits since Sep’02: 23,264
    =19.5 Mo.s’ Supply!!!! ==^^^

    Maybe they’re not making any new land around here, but they are clearly still making new houses!

    For all the latest Silicon Valley news, please visit:


  11. Michael C. commented on Nov 17

    Never underestimate the consumer.

    That’s what I learned when I read about people pitching tents 10 days in advance in front of circuit city to buy the new Playstation 3.

    Their resolve is amazing!

  12. Michael C. commented on Nov 17

    A prime example of how real estate can be highly localized.

    A new development in Orance County, CA selling ~$700k condos has a wait list of over 100 people. In their 1st phase release, none cancelled.

  13. Bob A commented on Nov 17

    “This is a shocking number.” Was he living in a cave?
    How can anybody who actually gets paid to be in such a position claim such ignorance of the reality going on around him. As if the reality from which this number was generated was somehow invisible from all of us until the number was released. Amazing.

  14. Michael C. commented on Nov 17

    From Tony Crescenzi at RM:

    The inventory adjustment process will last probably into 2008, but it should be shorter than the one that gripped the housing market in the early 1990s. Here are the main reasons for this:

    Inventory-to-sales ratios are lower today than they were at their peak in 1991. For example, the inventory-to-sales ratio for new homes is today at 6.4 months of supply, compared with 9.4 months in January 1991.

    The interest rate environment is better today than it was in the early 1990s. Recall, for example, that the average rate for a 30-year fixed-rate mortgage was over 10% in 1990 and it was as high as 9.25% in 1994 when the bond market was fearful of an acceleration in the inflation rate. Today, years of success in controlling inflation have led to subdued inflation expectations, and the 30-year mortgage rate is at just 6.25%.

    More of today’s inventory burden is “professionally” managed. This is mainly because the nation’s largest home builders control a greater share of the housing market than they did in the early 1990s. The large homebuilders have the capital to hold on to inventory better than smaller builders, who are more likely to liquidate at much lower prices in order to raise capital.

    This particular factor is a bit weak at the moment because of the recent strength of the stock market. The fact is, however, that since 2000 the equity risk premium has increased, making alternative investments look relatively more attractive, including real estate.

    Demographics are more powerful, meaning that household formation is higher today than it was in 1990. The key homebuying years are ages 25-29 and over 45 (for second homes). In 1990, the number of people turning 25 actually fell, owing to the fact that fewer people were born in 1965 than in 1964, the last year of the baby boom. This is not the case today, as the number of people turning 25 will be increasing in the year ahead. Similarly, the number of people turning 45 will be increasing much more than in the early 1990s.

    Urban sprawl continues to increase, with suburbia high on the list for new households looking for a place to live.
    None of this is meant to say that the housing market will be strong in the months ahead. I mean only to show that there are a number of factors that will help to prevent an implosion in housing demand. So long as that is the case, the erosion in home prices won’t be substantial relative to the amount that they increased in recent years. Although the negative effects from construction are likely to slow in 2007, the impact of other housing-related categories will increase.

    I am sure many of you disagree.

  15. James Bednar commented on Nov 17

    A prime example of how real estate can be highly localized.

    A new development in Orance County, CA selling ~$700k condos has a wait list of over 100 people. In their 1st phase release, none cancelled.

    Was a non-refundable deposit required, or was it non-binding no-deposit?


  16. Michael C. commented on Nov 17

    >>>Was a non-refundable deposit required, or was it non-binding no-deposit?<<< Non-refundable. From my visit, you would think it was 2004 all over again. This is a nice neighborhood and buyers appeared strong. Either they were starter families or older mom and pops with sizeable cash looking for an investment. None of that Florida flipper garbage. ...at least that's what it seemed. I realize this is way out of the norm. But wow on how different it is.

  17. Gary commented on Nov 17

    Last year in Las Vegas I noticed that just about every apartment complex was converted over to condos for sale. I just saw a large banner on one of those complexes today “Luxury condominums for rent”
    Does anybody know of a bubble anywhere in history where the public piled into an asset class like they did in housing or the Nasdaq that didn’t end in a hard landing. Off the top of my head I can’t come up with any. I wonder what that says about the chances of a soft landing this time.

  18. GER commented on Nov 17

    greenwich capital has very very good research regarding US housing (issued this week) …try to find it

  19. winjr commented on Nov 17

    anderl wrote:

    “The housing market may be stable when it comes to prices on existing properties,”

    I wouldn’t call back-to-back monthly YOY median declines, the first in 15 years, a sign of stability.

  20. joe commented on Nov 17

    Gary, Jeremy Grantham at GMO deems an asset bubble to be a 2 standard deviation move from the mean. I believe he has identified 29 of these in history. 28 have mean reverted, i.e. crashed. He says there’s a chance that the 29th bubble – the US housing market – won’t do so, but that it would really have to be “different this time”.

  21. jkw commented on Nov 17

    The interest rate environment is better today than it was in the early 1990s. Recall, for example, that the average rate for a 30-year fixed-rate mortgage was over 10% in 1990 and it was as high as 9.25% in 1994 when the bond market was fearful of an acceleration in the inflation rate. Today, years of success in controlling inflation have led to subdued inflation expectations, and the 30-year mortgage rate is at just 6.25%.

    You’re looking at the wrong numbers on interest rates. It makes no difference what level they are at. What matters is how quickly they are changing. The early 90’s were a falling rate environment. We are now in a fairly stable rate environment (with occasional ups and downs). In a falling rate environment, a fixed monthly payment buys a more expensive house as time passes. In a flat rate environment, a fixed monthly payment buys a fixed price house. So in the early 90’s, waiting 6 months lowered the cost of buying a house by 3-5% without a price cut. Now, to get the same drop in cost, the price has to fall 3-5%.

    A I have said many times before, house prices are going to fall back to their inflation adjusted 2000 levels within the next 3-4 years. The only unknown is how much of the 30-40% price drop will be from inflation and how much will be from nominal price drops. We’ll be lucky if prices don’t overshoot on the way down. A graph of inflation adjusted house prices looks like a bouncing ball, and there is no reason to think things are different in this cycle.

  22. MarkM commented on Nov 17

    But what does it matter? Dow up 20! Let’s buy!

  23. RW commented on Nov 17

    One would think a decline this large ought to make the Fed reconsider their (apparent) assumption that there will be little spillover from real estate dis-inflation into the general economy, not so?

    WRT David Lereah, “You can’t make somebody understand something if their salary depends upon them not understanding it.” – Upton Sinclair

  24. Michael C. commented on Nov 17

    >>>A graph of inflation adjusted house prices looks like a bouncing ball, and there is no reason to think things are different in this cycle.<<< I pulled up just what you are referring to -
    Graph of Inflation-Adjusted Housing Prices

    I’m not sure I would use the term bouncing ball for that chart. I do see how prices stay within a range for its own particular cycle.

    But at least from the chart, when housing prices break the cycle, they enter a new range for a long period of time. It seems this is what happened starting in 2000.

    So from the chart, things ARE different in this cycle. If this were a stock chart, it shows that past breakouts only retraced about 25-50%. To go back to 2000 levels would be a full retracement. Back to 2004 levels seems more likely, where some of the gains by early home buyers in this cycle are protected.

  25. David Price commented on Nov 17

    Hi Barry, A question and a comment. If the Fed lowers rates will that solve the housing problem? Why not sell the excess housing to the illegal imigrants! Dave

  26. jkw commented on Nov 17

    Sorry, I only had data going back to about 1970. Even on that chart (going back to 1890), there is only one period where house prices deviated substantially from staying flat for very long. 1915-1945, which basically corresponds to WWI, the great depression, and WWII. I’ve seen a similar chart going back to about 1600 in Amsterdam. The depression era sticks out on that chart too. The one-time bump up in the 40’s was a correction of the fall 30 years earlier. It is not something that has happened at other times in history.

    The reason is that inflation more or less tracks income. The amount that people are willing to pay for housing as a percent of their income has not changed over time. There is no reason to think it has changed now either. The housing bubble was created from excess credit allowing people to borrow excessively large amounts of money without having to pay for it. Unless you think that will continue indefinitely, prices will return to their historical norms.

  27. wcw commented on Nov 17

    MC, good comments. I have a lot of sympathy for some of your arguments, but on balance I remain a housing bear.

    I/S ratios are indeed not as bad as they have been at times. Still, they are three times what they were in the 2000s, and that matters. Inventory burdens may be professionally managed, but they are also still mostly private — 75% of the builder-developer market, from what I heard listening to the UBS homebuilder CEO panel. Per BZH’s CEO, “[t]he 75% of the business that’s still in the private hands, it’s in their interests to keep drawing down their bank lines, and to keep doing that they have to keep building… Currently, I think they’re still pushing inventory into the market..”

    Price and rates work together. Talking about rates without prices is meaningless and vice-versa. There are lots of affordability measures; I did one six months ago that measured the mortgage on an OFHEO-index house at current rates versus the median income for a family of four. The numbers are a couple quarters old, now, but not much has changed. Affordability is terrible, as bad as it was at the ’89 price peak, rates or no rates.

    In re demography, I have read similar but not seen very good analysis on the data. The best I have seen concludes that household formation did not spark the ‘2000s price boom. Cf this Chicago Fed paper (PDF). They conclude the driver may have been innovative financing (read: subprime lending). Subprime lending will continue, but it is being reined in.

    Last, for-sale-only vacancy rates are things we have never seen. I don’t know exactly what’s going on, but I do think this means current inventory numbers may be understated somehow.

  28. jkw commented on Nov 17

    The other factor is that you have to use non-hedonically adjusted inflation numbers, to be consistent with the rest of history. Since 2000, that would put inflation at about 6% instead of about 3%. For 6 years, 3%/year gives an increase of about 20%, but 6%/year gives an increase of closer to 45%. Which means that about 20% of the increase is already accounted for in real inflation but not official inflation.

  29. Mike_in_FL commented on Nov 17

    Regarding this comment…

    The interest rate environment is better today than it was in the early 1990s. Recall, for example, that the average rate for a 30-year fixed-rate mortgage was over 10% in 1990 and it was as high as 9.25% in 1994 when the bond market was fearful of an acceleration in the inflation rate. Today, years of success in controlling inflation have led to subdued inflation expectations, and the 30-year mortgage rate is at just 6.25%.

    The LEVEL of interest rates isn’t what matters in terms of mortgage affordability. It’s the relation of rates to PRICES that determines monthly payments.

    Would it surprise you to know that it’s more expensive (on a per-month basis) to buy a median priced home today with a 30-year fixed mortgage and 20% down than it was in 1981 when 30-year mortgage rates were above 18%? I ran the numbers using the October 1981 median price of an existing home ($66,000), and the October mortgage rate average of 18.44% (that’s when rates peaked) — and the September 2006 price ($219,800) and monthly rate average (6.31%).

    You get a principal and interest payment of $814.72 on an 80% LTV mortgage — $52,800 — in 1981 … and a payment of $1089.55 on an 80% LTV mortgage — $175,840 — now. That just goes to show how it’s meaningless to throw out those old, tired comments, like “Well, people still bought houses when mortgage rates were 15%” … or “I remember my first mortgage had a 16% rate. How can housing tank with rates at 6%?”

  30. Estragon commented on Nov 17

    Census/HUD reported new single family home sales as 1,021,000 in August and 1,075,000 in Sept. As I recall, these numbers are based on contracts signed, contracts which many builders are still reporting as having very high cancellation rates.

    Today’s permits numbers show single family permits at 1,219,000 in Sept. and 1,173,000 in Oct. This suggests permits are currently outstripping sales by about 10%.

    Today’s numbers also show home completions of 1,702,000 in Sept. and 1,561,000 in Oct., both well above current sales levels.

    These data don’t appear to support the case that demand is currently outstripping supply, or that a bottom is at hand, as was suggested by Tony C.’s article.

  31. Steve commented on Nov 17

    /rant on

    Arggh, My pet peave with newspapers is non-zero based charts. For data like this all the charts should be zero based so you could see the actuall percentage drop or rise. The average viewer would see the first “housing starts” chart as a 60% drop when in fact it is only a 25% drop.

    I know Barry borrows these from elsewhere,but can’t the WSJ do better.

    /rant off

  32. wcw commented on Nov 17

    Of course, zero here means working off inventory, since to keep pace with population you want ~1% annual growth in housing units. There are ~110m occupied units nationally, so the real zero is not 0 starts, but 1.1m.

    The WSJ’s zero is at 1.2m.

    I think they were pretty darned close.

  33. jkw commented on Nov 17

    In addition to population growth, you need to build units to replace any that are torn down. I’m not sure what the old housing destruction rate is, but it’s certainly higher than 0. 1.2m/year might be the right level to keep pace with household creation and old unit destruction.

  34. Cherry commented on Nov 17

    The denialists are singing the new hit song: I want to believe, I want to believe, I want to believe……..Sometimes believing isn’t a enough.

    If the Builders implode enough, Starts could fall all the way back to the .800 of 1991. That would really clean up the overhang, but the construction losses would be immense and it wouldn’t be easy to start building quickly again either. The industry may take 5-7 years to recover.

  35. Rich commented on Nov 17

    It is a myth that housing needs to keep up with population growth. The only population growth in this country for the foreseeable future is in lower income families and immigrants. This is not the demographic group that buys real estate, and when they do, they are likely to consolidate multiple families under one household. Meanwhile, the primary demographic group that owns property is heading into retirement and death — which will lead to more vacant homes in established neighborhoods that need to be liquidated. The hottest real estate commodity for the foreseeable future will be the assisted living apartment and nursing home room. Buy now before demand skyrockets!

  36. Danielle commented on Nov 17

    I still don’t understand how you refuse to call it a bubble.

    Considering there’s a whack of buyers who put zero or peanuts down, a couple percentage loss on zero down is huge negative return!

  37. Danielle commented on Nov 17

    “The hottest real estate commodity for the foreseeable future will be the assisted living apartment and nursing home room. Buy now before demand skyrockets!”

    Actually, the empty McMansions could be converted into nursing homes.

  38. mike99 commented on Nov 18

    another new high on the dow as housing starts and permits plunge…when will investors wake up.

  39. VJ commented on Nov 18

    Check out Ed Yardeni on Friday’s Lehrer News Hour:


    A few gems:

    * “Housing is in a recession for sure, and the jury’s definitely out right now on whether that spills over into the rest of the economy. I don’t think it will.

    * “Consumer spending is very strong because we’re creating lots of jobs. Real incomes are very strong, all-time record high…

    * “I don’t think Americans are stupid. People aren’t just buying things that they can’t afford.

    What alternative universe is he living in ?

  40. Richard commented on Nov 18

    as long as there’s cheap and easy credit this situation can last a lot longer than anyone would imagine. it’s first and foremost about credit my friends.

  41. Philippe RAFAT commented on Nov 18

    The real estate market troubles will be solved, at a time at a price, “when the real estate market goes well, everything goes well” as it is an upstream and downstream provider of employment and a catalyst or a byproduct of a virtuous circle which turns in a vicious cirle when the households become financialy overstreched.
    The last crisis in 1996 started with laments and has been prolonged as dormant untill 2000/2001 (the worst period will appear when no one will comment it anymore), there is no quick cure when it appears in the best of the possible world (historicaly low interest rate for mortgage financing, full employment 4,6%,economy working at full capacity 82% of its industrial production) It is an atomised market and capital intensive in its aggregate value, how to solve this equation without arming the prices without arming the banks, the owners?, but it will be solved through time as it has ALWAYS BEEN.
    On a more optimistic note a house is where you live, it only becomes a tradable instrument if you need to move and the flue is so widespread that there is a high probality to find the same house in a comparable environment elsewhere. As regards the speculative component of a real estate purchase it has to be faced as it is a…speculation.
    Most of the comments, Bill Gross does not spare any efforts on this end.., is that the fed should decrease the interest rate as a cure to solve the real estate market problems. when the primary mandate of a central bank is the preservation of the price stabity and the alleviation of inflationary pressure in the economy.
    The outcome the last fed minutes did not make the lowering of interest rates waranted as their readings of the inflationary measures did not seem to induce it . There is a disturbing confusion in the interpretation of the mandates of most of the central banks, their primary duties are price stability and the preservation of the payment system.

  42. Cherry commented on Nov 18

    JFI, it is not at 82% capacity, but dropping.

  43. JohnB commented on Nov 21

    There is still ALOT of pain to be felt in housing. We are no where no a bottom.

    I fully expect to read on the front page of the LA Times about ordinary familes “swearing off real estate”, broke, shattered dreams, handing in their keys. There will be investigations into exotic financing. Joe and Jane Smith will testify…”but I didn’t know they were risky!” It’s going to be a disaster.

    When I read what the NAR is saying now, it reminds me of the cheerleaders of the late 90’s saying “whew, that drop was scary……but, everything is going to be ok, prices will go right back up.” Switch the NAR economist with Abbey Joseph Cohen.

    Donald Trump is still teaching people about real estate. This is not a bottom!

    There will be bodies in the street when the dust settles. Over optimism, as it always does, will get alot of people in trouble.

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