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| Continued Depressed Production Will Enable Future Recovery |
| Written by Jonathan Smoke | |
| 08.19.2008 | |
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Discuss this article on the forums. (0 posts) The Commerce Department released the initial readings on new home construction in July today. The numbers reflect depressed demand and controlled production that will continue to enable slow progress against inventories and an eventual stable recovery. Total permits in July were at a seasonally adjusted annual rate of 937,000 units, which was 17.7 % below the revised June rate of 1,138,000 and 32.4 % below the revised July 2007 estimate of 1,386,000. Both readings are statistically significant that total permits declined in July. Single-family permits in July were at a rate of 584,000 units, 5.2% below the June figure of 616,000 that was revised upward from an initial reading of 613,000 units. These figures were also statistically significant. Total housing starts in July were at a seasonally adjusted annual rate of 965,000 units, which was 11.0 % below the revised June estimate of 1,084,000 and 29.6% below the revised July 2007 rate of 1,371,000. Both readings are statistically significant that total starts declined in July. Single-family housing starts in July were at a rate of 641,000 units, 2.9% below the June figure of 660,000 units that was revised upward from an initial reading of 647,000 units. The change was not statistically significant, so we are not certain that single-family starts were lower. Overall, the continuing decline in production activity is not surprising, and it is not necessarily a sign that we haven’t hit a bottom yet. It is a reflection of the current market where builders are controlling inventories as best they can while demand remains depressed. Anecdotally, we know that no speculative building is occurring. Smaller builders cannot get financing to support speculative building even if they wanted to. Larger builders stopped speculative building months ago and have been aggressively clearing standing inventories. When the new home sales data come out later this month, we will see that new home supplies are not getting worse. For months now, production has been less than absorptions. By our calculations, we are finding demand for the last 18 to 24 months to be depressed by 20-40%. Since many traditional (i.e., not investment) home purchases are driven by life events, these postponed purchases cannot go on forever. Eventually need and opportunity will drive people to shop and buy. The current buying opportunity is great—prices are lower and not likely to fall much further or at least as much as they have already in most markets. The new home buyer tax credit adds further incentive. Finally, while interest rates are historically low, they are not likely to remain as low in the future. When households see that the opportunity is great but timing is limited, they will start to buy again. And when they do, supplies will abate relatively quickly since the current readings of supply are based on some of the most depressed absorption rates we’ve seen in decades. Today’s production readings are simply another sign that we are moving in the direction of an improving environment for housing to stabilize and expand in the future. 
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