Starts Head Farther South; Supply’s Finally Less than Demand
As the housing starts story continues to make home builders and their materials and products suppliers grimmace, the bad news is becoming good news.
Most of our dads or authority figures liked to hear the bad news first, so we’ll comply with that dictate. The Wall Street Journal reports:
U.S. home building and industrial production plunged last month as the recession puts Americans out of work and slows their purchases of cars and houses.
Key pieces of economic data were released Wednesday, including a U.S. Commerce Department report showing housing starts in January tumbled 16.8% to a seasonally adjusted 466,000 annual rate compared with the prior month.
At the same time, we’re going to have to gulp and see a worsening report card on the overall economy, according to the New York Times.
In gloomy economic projections released by the central bank, the Fed’s Open Market Committee said it expected that the economy would contract by 0.5 percent to 1.3 percent this year, that unemployment would soar to 8.5 to 8.8 percent, and that inflation would remain under greater pressure.
Bleak economic data reflecting a sharpening slide in housing, trade, industrial production, spending and employment rates “more than offset” any potential impact from an economic stimulus plan, the Fed said, forcing it to cut its economic outlook.
Which leaves it up to the “silver liners,” those who can’t take too much of a bad thing. But seriously, despite the fact that demographic projections regarding household growth might find themselves derailed like everything else these days, one could believe that housing will begin to correct when demand for homes actually outpaces supply. We haven’t seen that for some time.
Now that housing starts have dropped to such depths, we’re just about at the tipping point, at least according to this report from CNBC contributor Tony Crescenzi, chief bond market strategist at Miller Tabak+ Co.
Importantly, housing completions fell a record 24.2% to a record low 776k annualized rate, the first reading below 1.0 million since 1982. The is extremely important because until now builders were still completing homes at a pace too strong for current conditions, preventing inventory levels from falling more rapidly than they recently have. Now that fewer homes are hitting the market for sale, the growing U.S. population will have fewer homes to choose from. This will accelerate the recent decline in home inventories. Have no doubt: this is a game changer for inventories and prices.
Doubters on the inventory idea will surely point to the difficulties that prospective homeowners face in obtaining credit to purchase homes. In doing so they will ignore the most important top-down concept, which is to compare the net change in the housing stock to population growth and household formation.
The concept is simple: a basic element of human survival is shelter and the need for shelter increases along with the population. Housing starts have now fallen to levels well below what is needed to support population growth. Whether people can afford to purchase a home or obtain the credit necessary to do so is not as important as the fact that they need shelter and will rent space if necessary. The bottom-line is that empty homes will become occupied one way or another so long as builders under-build relative to population growth.
The tough part for home builders is this: Of the few brave souls who are still buying new houses, about half of them want to buy a ready-to-move-in home. This means home builders have to build spec homes even though spec homes are part of the problem.
This makes the good news bad news in its way. Home builders still have to over-produce to meet the needs of at least 50% of their current customers. This means starts will probably bottom soon based on real orders and purchases, and will be a solid baseline.