Wednesday, February 18, 2009

Housing starts still falling but the bottom is near (2)

We haven't yet hit the bottom, but we must be getting close, if only because starts aren't too far from zero. As I've mentioned before, the level of starts is now so low that further declines have only a negligible impact on GDP. So the big decline in January housing starts is really not significant news, and I post this mainly because the decline has been so impressive from an historical perspective that it warrants attention—this has been the mother of all housing recessions. As Brian Wesbury notes, the current decline in housing starts is clearly not sustainable for much longer, and when it reverses, as it most definitely will, that will be big news.

10 comments:

Mark A. Sadowski said...

Scott,
When housing prices approach their real average from 1890 through 1997 according to Robert Shiller's measurements I'll believe you. (In order for that to happen it will take another 30% decline from current levels.)

Check out the data:

http://www.irrationalexuberance.com/

Colin said...

Yeah I am looking at the data on Ritholz's blog and I think we may still have a little ways to go:

http://www.ritholtz.com/blog/2009/02/homes-still-too-pricey-to-stabilize/

Donny Baseball said...

Gentlemen-
Does this analysis or home prices adjust for hedonic factors. The price of a home built today should also reflect better construction materials, stricter codes, many more convenience features, etc.

If our homes are now built 30% better and more appealing, why should prices equal their real average from 1890-1997?

Would you expect a non-invasive arthroscopic kidney stone removal that has you back on your feet in 3 days to be the same price as the 1970s era procedure that required 3 weeks recovery?

Cabodog said...

Great post on Carpe Diem:

http://mjperry.blogspot.com/2009/02/more-on-california-real-estate-market.html

Affordability is way up and shows in the number of sales.

Bernard said...

Scott,

I was wondering what your thoughts were on the fresh round of tax hikes in California? Could we see the same process occur in a few other states? And at what point do you foresee the Nations taxes shooting up due to the Federal budget crisis?

Regardless of stimulus, it would seem most people should be expecting their future taxes to be significantly higher than they are today?

Bernard

Cabodog said...

On the low end, housing prices are below cost of production, as witnessed by the plunging housing starts.

Affordability is way up and interest costs on 40 yr. mortgages are way down. Sales in California are way up.

On a sidenote, our local government has decided to HIKE system-development charges, as the low volume of construction results in the development department's overhead spread over fewer building permits. Wish I could do that it my business -- hike prices to account for lower volume.

Bottom line is that with the commodity (housing) selling for under the cost of production, just how much longer can that occur?

Scott Grannis said...

Cabodog: Don't forget that production costs can always fall. I'm told that contractors are willing to cut their prices for the first time in memory, in order to keep working. I'm embarking on a remodeling project to take advantage of lower prices.

Scott Grannis said...

Donny: I don't think hedonics are factored in. The best measures we have of prices are those that track the selling price of the same home over time. I've tried to incorporate hedonics by figuring that prices tend to increase over time in real terms. My best guess for what that might be is 1-2% per year. That would suggest that Mark's expectation of a housing price floor is too low.

Scott Grannis said...

Bernard: California taxes are rising and that will probably mean that more people decide to leave (a lot have left already), and that will put some downward pressure on housing prices here.

Federal tax burdens will almost surely rise in the future. That's a depressing thought, but I think it has been incorporated into equity values today.

Cabodog said...

Scott,

Yes, it's good time to remodel with labor costs lower. In our town in 2006, there were just too many subs driving new, lifted F350s, indicating that they were making too much money...

My point is that with housing starts so low, that's a sure sign that builders can't build and compete with existing home resales. Housing starts will only increase once existing fire-sale inventory is off the market -- and prices start to rise.

The California statistics are indicating a bottoming of the market; sales are over 200% higher than last year on depressed prices. Overall, California has a 5.6 month inventory of homes and that includes ALL homes which is more of a normal inventory than 18 months ago.

I assume that in the "affordable" range, the inventory of homes is even less (perhaps three months) as most of the sales activity is at the lower end (as evidenced by the declining median price). The mid- to upper-end in housing is somewhat frozen.