Wednesday, January 21, 2015
December housing starts beat expectations (1089K vs. 1040K), but not by much, considering how volatile this series normally is, and how important seasonal adjustment factors can be. Missing from the headlines were upward revisions to the past two months. Pessimists will note that the level of starts in November 2013 was slightly higher than the latest reading, suggesting that starts have been relatively flat for the past year. I prefer to look at a 12-month moving average of starts: that shows starts last year were 8% higher than in 2013. That's pretty decent growth. Plus, as the chart above shows, the level of builder sentiment suggests conditions are likely to continue to improve, if only modestly.
From a long term perspective, housing starts today are still miserably low. That's depressing on its face, but the optimist in me sees the tremendous upside potential should underlying conditions continue to improve. Why couldn't housing starts double over the next 5 years or so?
Untapped potential is the story of the overall economy as well, as the chart above shows. The economy is currently about 10% or so below its long-term potential trend. If policymakers move in a growth-friendly direction (e.g., eschewing tax hikes, reducing regulatory burdens, simplifying the tax codes, lowering marginal rates, eliminating deductions and subsidies, lowering corporate tax rates) we could be on the cusp of some significant growth in the years to come.
It makes more sense to focus on what could happen if things go right, than to lament how many things have gone wrong.
UPDATE: The chart below shows an index of new mortgage originations (not refis). At the end of last year it had reached a multi-year low, reinforcing the widespread belief at the time that the housing market was running on fumes. But in the past three weeks, new mortgage initiations have jumped over 25%. (Caveat: this is a seasonally adjusted index, and this is the time of the year when activity is typically slow, so the adjustment factors are large and could easily be wrong.) We'll have to watch for further strength, but in the meantime this fits nicely with the noticeable pickup in bank lending in recent months that I noted yesterday.
Posted by Scott Grannis at 9:49 AM