Thursday, January 22, 2009

Housing starts are still falling, but the bottom is near

Housing starts have truly collapsed. I've been thinking we were getting very close to the bottom in residential construction, and while the December numbers show no signs yet of a bottom, the level of starts is now so low that its relevance for the health of the larger economy is fading fast. Residential construction is now at its lowest point relative to the economy (about 3%) since data were first collected. The next big story out of the housing market will not be one of weakness, but of renewed strength. That might still take several months, but we're closing in on that point fast.


prophets said...

but we still got 11-12 mo of housing inventory to work off...

wouldn't it be more prudent to look at it from that standpoint?

Scott Grannis said...

The level of construction activity is now so low that it almost doesn't matter if it goes down another 10% or 20%. It's a very small part of the economy. Plus, contractors are now lowering their prices in an attempt to get work. The adjustment is now happening rapidly on all fronts: less construction, lower home prices, lower interest rates, lower construction costs, and lower inventories.

srr said...

The poor housing start numbers
are actually a good sign that
the inventory is now working off.

Great blog with very helpfull
economic analysis. Keep it going,
Steve R


Scott Grannis said...

srr: Thanks!

SpeakToMe said...

I think we have another tough year ahead in terms of housing deflation. I hope we avoid mortgage cramdowns and other responses that will serve to create a host of "zombie" mortgages, increase "payment uncertainty" and extend the recession by years.

This is a lesson to be learned from Japan's experience:

Scott Grannis said...

I suspect cramdowns are coming, and that's not good. Prices nationwide haven't bottomed yet, but in some areas they may have (e.g., Inland Empire of Calif.). But we are unlikely to face the problem the Japanese had, or if so, ours should be much less painful. The Fed has quickly implemented quantitative easing, whereas the BoJ waited many years to do it. We are allowing bank writedowns and consolidations, whereas the Japanese protected the banks for many years.

I'm not saying everything is going to be great here, only that we needn't expect a decade of deflation like the Japanese had.

Anonymous said...

Greetings, sir. Do you still believe we could see 4.5 ~ 4.75% mortgages, or is that window closing?

(Really love your site. I've started reading it daily.)

Cabodog said...


As always, really enjoying your posts.

CNN posted a troubling article regarding foreclosures today:

Basically, they're saying a flood of foreclosures may be coming due to pent-up processing of foreclosures.

11-12 months of inventory is high, but we only need to get to six months of inventory for a "healthy" market.

Interested in your comments regarding the CNN article.

Scott Grannis said...

Rod: the jump in 10-year Treasury yields is a sign that the window for 4.5% mortgages may be starting to close, but it's too early to say for sure. There is still a reasonable chance.

Scott Grannis said...

Cabodog: if what the article says is true for most markets, then the bottom in housing prices will be pushed further out. I don't know enough to say one way or another. I do think, however, that the financial markets are already braced for bad news like this.