Housing Starts

Homebuilding still to high for comfort

Housing starts dipped back below the one million mark in July. However, we believe they need to go a lot lower than that to whittle the inventory of unsold homes down to a more manageable level. With credit conditions still tight, and likely getting tighter judging from the Fed’s latest Senior Loan Officer Survey, there is little hope on the horizon for an up-tick in sales. Thus, home building needs to contract by another 30%, to below 700k and stay in that range through at least the end of 2009 in order to get months’ supply down, in our view.

A wall of homes for sale entering the market in July

Housing starts declined to 965k in July, from an upwardly revised 1084k in June, about in line with expectations. The numbers thus are about in line with our 3Q GDP tracking. The more forward-looking permits fell to 937k in July suggesting further downdraft in starts in the months ahead. Housing completions remained elevated at 1035k in July (791k singles and 244k multi units), which will not help the supply situation and continue to be a source of downward pressure on prices.

Months’ supply to drop to 9.4 in July
Single starts dropped to 641k in July, the lowest since January 1991, but even this is well ahead of the pace of sales. So, we believe the number must fall significantly lower to address the inventory situation. Given our expectation for sales to decline by 1% in July to 411k units, we expect months’ supply to drop to 9.4 months from 10.4 in June. As expected, multi starts dropped by 23% MoM in July to 341k from 424k in June. The June number had been boosted by a rash of activity ahead of a building code change in the New York City area.

Looks like a bottom to me!!!! (wink wink)

Simplest, most accurate analysis–and the market woke up!

Rob P, I think bottoms don’t occur at intersections, but typical at points of massive overrun, IMHO. So, hold on to your hat I think the ride is just beginning.

The graph is incomplete: Please put an arrow showing where Greenspan retired. ;)

Barry- Can you overlay the two charts? It appears from the naked eye that lows on the housing starts coincide w/ the highs on the months supply. Sans the tight credit conditions, that would imply a bottom no?

Rob,

“Looks like a bottom to me!!!! (wink wink)”

Ah, we should all be Yunified.
.

Don’t worry about the housing market, folks, Fannie Mae is going to come to the rescue.

How you ask? Why, by doing the same thing that got us to this point in the first place.

Today, I kid you not, I received a telemarketing call from Fannie Mae offering me a mortgage, even if I had no credit or bad credit.

It was a recorded message and I didn’t stay on the line long enough to learn how to proceed if I was interested, but I should have just for research purposes.

Instead, I was laughing hysterically at the thought of Fannie promoting subprime mortgages while currently losing hundreds of billions on such loans.

There should be no bailout for these fools, only liquidation.

Dogwood

What the charts do not show is the huge phantom inventory that lenders have that they are keeping off the books and market. In my market in south Georgia only 35 homes sold and there were 70 forclosures in July. Typicaly we sell 250 homes a month in this market. There are over 2000 homes listed for sale in the market as well. This is in an area with job growth. Lenders are locked up and loans only to those with perfect credit.

There is no bottom…. yet.
Remember, these are housing starts. Quite a few starts will be projects that are already permitted and funded. Just because banks are clamping down now, that does not mean that many projects have already gotten the loans.
If you notice a trend, building booms reach max speed near the end of a bubble. Developers and their ilk are always late on the draw. Come to think of it, typically any industry is late on the draw since they analyze past trends to make future predictions… they almost never use data collected on the streets in real-time to make decisions.
That being said, we notice the banks are beginning to clamp down and will over-correct. Same will follow suit for builders. Of course, by that point only few will qualify for a mortgage, and many more will have lost their homes. Not to mention the ever-increasing unemployment and rising prices.
What I’m getting at, is that the bigger the bubble, the bigger the correction. While housing, specifically will reach equilibrium within a year or two, that won’t signal a comeback.
We won’t have a comeback until the other wounds to the economy have healed. Tighter loaning practices may well linger a generation (if banks at least temporarily learn their lesson). People will be forced to cut back and save… which will in time put many in position to buy again.
There is no magic indicator or sign that there is a bottom. We’ll only fully recognize it once we’re on the upswing again.

Time heals all wounds, even economic ones.

What makes deflation so dangerous is that buyers form expectations for lower prices in the future. The rational response is to defer purchases as they wait for lower prices. That’s what has been happening in housing the past 2-3 years.

That’s why I don’t like the “months supply” metric. It projects currents sales rates into the future. But once prices bottom, purchasing behavior could change as people who have deferred purchases finally get the confidence to buy.

But price is only one factor to consider. Unfortunately, other equally important variables that matter such as the state of the labor market, incomes, mortgage rates, mortgage availability, etc. are all going in the wrong direction.