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| Declining Starts Set the Stage for Gradual Recovery |
| Written by Jonathan Smoke | |
| 02.20.2008 | |
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Discuss this article on the forums. (0 posts) The Commerce Department reported January permits and starts today. The headlines off the report said starts were up over December but permits were down. That headline is a bit misleading.  If you dig into the report you will find that while total starts were up less than one percent over the December figure, single family starts, which make up almost 75% of total starts, were down 5.2% over December.Much more informative were the stats in year-over-year comparisons. Total starts not seasonally adjusted were down 32.1% over 2007. Single family starts not seasonally adjusted were down 38.9%. In fact, starts have been down year-over-year in every month since March 2006. So, if you compare starts at a seasonally adjusted rate to that March 2006 peak, you find that total starts are down 48.5% and single family starts are down 53.9%. Or simply put, the level of new home construction has fallen to less than half of what it was at the peak. National media like the Wall Street Journal are reporting that this is evidence that “the housing downturn has deepened,” but I disagree with that characterization. These stats are a clear reflection that the suppliers of new homes have responded to a lessening in demand. That does mean that builders, developers and suppliers have reached a new low in activity for recent years, but that does not mean that conditions have worsened. On the contrary it means that the stage has been set to reduce inventories and get back to more normal levels of supply. On that front, we still have a way to go. The January home sales stats come out next week. I expect we will see then what we saw in November and December: builders are selling more homes than they are starting. And guess what? Builders have pulled fewer permits than new starts, which are off older permits, for two years. For comparison, new home sales measured year-over-year have fallen every month since December 2005. So measuring the December 2007 reading against that peak, new home sales are down 51.7%. Therefore, production has adjusted to a decline in demand, so conditions are actually gradually improving for a recovery to happen. And, given the current relatively low levels of production, it won’t take much of an uptick in sales to whittle supplies down closer to equilibrium levels. Of course, all of these stats are at a national level. Supply and demand vary by market, submarket, and price point. With a little Housing Intelligence, you don’t have to guess about the conditions of your local market. |
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