Housing Starts … Good News!
Funny thing economics. One person’s bad news is another person’s good news. this morning’s housing start data is a good example. First here’s the data as reported on MarketWatch.com:
Housing starts plunge to another record low – MarketWatch
The market reacted very negatively to this news as if it is bad. Perhaps this morning’s dive in the Dow was more influenced by the poor job loss data and the news from Microsoft that it was laying off 5,000 workers, but somewhere in there the housing data added to the gloom. Both starts and the issuance of permits [and therefore an indicator of future starts] fell to record low levels. As a sign of the general confidence level in the economy these are very bad numbers. Clearly the construction business is going to take a long time to recover, and we should recall that construction was one of the very few bright spots for employment throughout the Bush years.
But wait.
We have a huge backlog of unsold homes. At the current rate of sales that backlog is almost eleven months. So the dramatic slowing down of starts will surely help, not hinder. The backlog will not be increased by a steady flow of newly constructed homes coming on the market later this year. Instead, as homes are sold, albeit at slow rates, they will diminish the inventory of unsold homes rather than be replaced. This means that even at our current low rate of sales there seems to be a floor developing under the inventory of unsold homes. That helps limit the likelihood of further declines in home prices. In turn that abates the erosion of equity and assists the whole recovery in housing. It was real estate that got us into this mess. Maybe this is the first sign that the rot is ending. The ripple will be felt in banking too: the credit crisis is an outcome of those horrible mortgage backed securities [‘MBS’] that no one knows how to value. If we start to get our feet under us in terms of home prices, then those MBS packages that look so toxic today will be easier to value, and bank balance sheets will start to recover too.
So why did the market not see the good news hidden in these awful housing start statistics? Because it thinks and acts like a short term herd. Sometimes it pays to stop and think a little more.
These terrible figures for home starts are actually very good news.
You heard it here first.
