Housing Starts Collapse … Again

I suppose it should come as no surprise, but the announcement today of an 18.9% decline in housing starts is still eye catching. here’s the news:
Housing starts drop 18.9% to plumb record low, U.S. data show – MarketWatch

Even with this decline the housing slump is likely to continue. Home prices are still above traditional affordability levels and I see no reason for those levels to have changed. In a slump it is reasonable to expect prices to overshoot on the downside and then recover as the economy generally gets going again. Markets always tend to overshoot in this way. If this is true during our current recession, then home prices still have 10% – 20% to go before the bottom is reached. That will continue to undermine the stability of the mortgage market and the erosion of home equity will reinforce the negative feelings of consumers. We were all so happy about the so called ‘wealth effect’ of mushrooming home equity values during the past few years as inflation drove prices through the roof. Now we were being vexed by the downside of the same process in reverse.

Real estate is a very poorly managed industry riven through with inefficiencies, not least our continued preferential tax treatment of mortgage interest costs. Anyone who buys a home using debt receives welfare support from the government. this welfare allows more people to buy homes, but it also encourages too much investment in housing as opposed to other forms of investment. This welfare is one reason why home prices are so volatile: home buyers do not face the true cost of home ownership and so do not make rational choices. Inevitably they spend too much on housing and save to little elsewhere. I doubt this will be changed any time soon, but it is worth reminding ourselves that housing crises are not always caused by stupid or reckless banks. Middle class welfare is part of the blame too.

Meanwhile my advice: don’t buy a house yet. the squeeze on prices will get you a much better bargain next year. Let those home owners sweat a little more!