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| Thankfully, Permits and Starts Continue to Fall |
| Written by Jonathan Smoke | |
| 11.20.2007 | |
Discuss this article on the forums. (0 posts) The Commerce Department reported October housing starts and permits today. Many were surprised to see total housing starts actually increase in October, but the “headline” increases were in multifamily. Digging into the data, single-family starts and permits both declined, and we should be thankful for that.Specifically, single-family starts fell to an annualized rate of 884,000 in October from 954,000 in September. Single-family permits fell to an annualized rate of 807,000 in October from 877,000 in September. That’s a good thing. The only way for new home inventories to fall to a healthy months’ supply is for new starts to slow down dramatically while builders sell current inventories aggressively. This appears to be what is happening. Housing demand is principally driven by household growth. Household formation has been very strong and indeed is expected to remain strong for decades. But, housing demand can be impacted severely by another factor—changes occurring to the home ownership rate. When that rate is increasing, we need new housing for new households as well as households moving into ownership. When the ownership rate is declining, we need new housing for new households net of the households vacating for-sale housing for rentals. As you can see from the above chart, we had quite a run for more than a decade as demand was increased by changes happening to the ownership rate. Those changes principally came from innovations in mortgages that turned into aggressively over-sold and poorly underwritten risky mortgages. The increased demand caused demand to exceed supply. That ignited prices in the fastest growth areas, which in turn attracted speculators who were looking for alternative investments to stocks as the tech bubble burst. The big builders also recognized the trend. And since they were bigger, more efficient, and well financed, they were able to ramp up production and tie up land to feed the surging demand. But starting in 2005 a tipping point was reached. Perhaps it was the reaction to declines in affordability or perhaps a few people wisely began to be nervous about prices continuing to rise. As appreciation slowed, speculators quit buying and, even worse, started selling their housing investments. As prices began to fall in so called “bubble markets,” normal buyers began to hesitate to sign new contracts or close on existing contracts. More people were happy staying as renters as they held out to see what would happen. And some households opportunistically cashed out. Then we hit the great mortgage credit crunch of 2007 when the ownership rate correspondingly tumbled as foreclosures began to surge and fewer people could qualify for mortgages of all types. The result was net demand of just over 500,000 homes. Therefore, we still have more supply than we need. So it’s a good thing to see permits and starts creep down to the 800,000s since there aren’t enough households needing even that many new homes. 
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