Housing Starts Plummet Further
Just when there were very slight rays of hope on the horizon about housing today’s announcement of new housing starts shows how much of a hill needs to be climbed before we are out of the hole we dug ourselves. Clearly housing remains a diabolical mess.
The headlines show that starts fell 12.8% in April to a record low of 458,000. This was well below the levels most ‘experts’ had expected and so cast a pall across the stock market.
Our obsession with housing got us into this mess and is turning out to be quite a millstone around our necks as we try to recover.
For those of you who are devotees of the Bernanke Green Shoot Theorem there are signs of progress even within this awful data. Starts of single family homes actually rose by 2.8%. The optimists will latch onto this figure and immediately paint an impending recovery. The problem is that there remains a huge overhang of unsold homes on the market as we enter the traditional real estate selling season. That inventory will take longer to work off if new construction adds to it. And as long as the inventory stays high home prices will continue to fall. Remember that about half of all home sales in the past few months have been of distressed properties. Those sales are typically at prices well below market levels and so act to depress values of the other homes in the same locale, whether those other homes are distressed or not. Sometimes this effect is sufficient to cause some of those other properties to become distressed as well – the owners are unable to re-finance because their home value is depressed.
There is plenty of evidence accumulating that the rate of decline in housing has abated and that we are nearing the bottom. That means we should see consistent very slow rates of gain in construction. But I emphasize the slowness of the recovery. We have a glut of housing. Our obsession caused us to build a massive over supply. Prices remain relatively high when compared with traditional affordability levels. There are two ways of making homes more affordable: falling prices; or rising wages. With unemployment likely to keep rising through this year, and with wage deflation a very real possibility the only sure way to get affordability back to levels where demand can kick back in strongly is to have home prices fall some more. maybe as much as another 15%. Either way housing is unlikely to see double digit inflation any time soon, so the kind of speculation we saw over the last few years is, hopefully, a thing of the past.
The problems in multi-family housing demonstrate the issues. Starts in that sector collapsed in April: they fell 46.1%. This sector is one to watch for two reasons. First it is very sensitive to wage levels and unemployment because many multi-family projects are aimed at lower income buyers. Second, at the higher income levels, e.g. construction projects in places like Manhattan, the shortage of financing and the sudden unwillingness of buyers to fork out multi-millions for apartments has undermined the viability of some developers. So a rising wave of bankruptcies amongst developers is looming.
Like many others I believe that housing is nearing the end of its collapse. Unlike them I don’t see a fast recovery. Instead my view is that housing has a very long slog ahead of it. And even then demographic shifts rob it of the insanity we saw earlier this decade.
The heady days are gone for a very long time.
That’s good. We need to channel our money into something that creates future wealth rather than pour it into endless rows of over-sized and economically unproductive property.
