Friday, July 17, 2009

Residential construction has bottomed

Housing starts in June rose to the highest level in 7 months, after falling for 3 1/2 years to the lowest levels since records were first kept in 1959. Residential construction as a percent of GDP also fell to its lowest levels ever. After languishing for 9 months, the stocks of major home builders are now beginning to rise. It would appear that we have finally seen the bottom in the housing construction market.

This is good news for housing in general, since it means that the inventory of excess homes has been cut substantially, and will likely fall further unless construction starts ramping up soon. This will help put a floor under housing prices. And to the extent we can feel better about housing prices no longer falling, that should provide a huge boost to the financial market, since it eliminates a big source of the uncertainty underlying the valuation of subprime mortgages and the institutions that hold them.


alstry said...


Not to burst your bubble, but Residential Contruction is DOWN! WAY DOWN in terms of dollars.

And after all, GDP is measured in dollars.

Homebulders today are erecting $100-200K homes where they used to build $500-$1MM dollar homes.

If you look at the dollar value of every public homebuilder's backlog, it is way way way way down. And that is after hundreds of private homebuilders have gone bankrupt.

So yes we are building a few more homes, but many of them are not much more than doll houses compared to the homes being built just a few years ago.

You will get updated confirmation of the above when a number of the public builders report in the next few weeks.

It is very difficult to service huge debt loads and cover the overhead of being public on selling entry level homes, especially at today's relatively low run rate.

My guess is $$$ backlog will be practically non existent....we shall find out for sure in a few weeks;)

Public Library said...

It is nice to see a little sanity regarding the Goldman earnings from someone in the mainstream media.

If there is no serious regulation that comes out of this we will most likely be revisiting a financial disaster in the future of epic proportions.

Public Library said...

Scott, you have been an uber bull since 2002/03. Are you never not a bull?

Scott Grannis said...

alstry: You are just not thinking about this the right way. Everyone knows that construction is way down. It's never been down so much no matter how you measure it. But that is not the point. The change on the margin is the most important. On the margin, construction is no longer falling. At the very least it has stabilized, and it could be increasing modestly. It has taken 3 1/2 years of construction cutbacks to get rid of excess housing inventory. Inventories will continue to decline of course, but if construction doesn't pick up then in a year or so we will have a housing shortage developing. So the bottom in construction activity is foreshadowing an improvement in construction activity. It also means that housing inventories have shrunk significantly and that will help keep home prices from declining further.

Scott Grannis said...

Public: I disagree. Goldman undoubtedly benefited from an absence of competition, and that was brought on by bad regulations. But Goldman and other banks/broker/dealers serve a vital role as intermediaries and providers of liquidity to our financial markets. They take lots of risk, and if they are right the rewards are commensurate. What we need is more Goldmans, not more regulation.

Scott Grannis said...

Indeed I have been bullish since mid-2003 (when the Bush tax cuts went through). I became less enthusiastic when credit spreads fell to very low levels and volatility was very low. I remember talking about some disaster waiting to happen, but I didn't know from which direction. I should have turned outright bearish then, but I didn't. Careless. I had another chance to turn bearish last year when it became apparent that Obama was going to win and I knew he was a socialist at heart, but I didn't. Careless again.

So I do have a bullish bias, and I acknowledge that I am an optimist at heart when it comes to the US economy. I do not have a good sell discipline, but I do have the ability to buy and hold through very ugly times as long as my long-term view is bullish.

Scott Grannis said...

I should add that I have a bullish bias on the economy, but I have been outright bearish at times regarding other things. I've been very bearish on T-bonds since at least the beginning of the year, for example. I've also been bearish on the dollar since late last year (see my year end forecast).

Public Library said...


Thank you for your honesty and I did not mean that you are bullish on "everything" but thanks for the follow through on the topic.

alstry said...


Economic growth is measured in dollars, not units.

If you are running a business, it is a game of dollars, not units.

In the end, profit and loss is measured in dollars, not units.

The ONLY way to look at it is dollars.

If you are forced to sell twice as many units for half the revenues, PRICES ARE CRASHING!

Which is exactly my point, there is no recovery in housing if you want to be intellectually honest...unless you want to include's Mattel's Barbie houses into the unit calculation.....but my undertanding is that Matel's revenues were down 19% this quarter as well....with Barbie doing even worse.

alstry said...

After languishing for 9 months, the stocks of major home builders are now beginning to rise.


Didn't the stocks rise before they crashed?

Have you looked at the debt coverage ratios of the public homebuilders?

Considering overhead and debt payments, at the low per community sell through and margins that builders are operating now, many would be financially better off shutting down.

I think you might find the next two quarters of earnings reports portraying a very different picture than your current perspective.

And to the extent we can feel better about housing prices no longer falling

Prices are crashing. It is just that the rich are being forced to liquidate their higher end homes at fantastic discounts bringing up the median prices. It is now hitting coastal properties as well.

When housing comes close to a bottom, I will be the first to cheer.

Paul said...

The Dean of the Institute of Alstrynomics just can't help himself.

Paul said...

"I had another chance to turn bearish last year when it became apparent that Obama was going to win and I knew he was a socialist at heart, but I didn't. Careless again."

Scott, how much, if any, do you think the meltdown in October had to do with a recognition of the reality Obama was going to win?

Scott Grannis said...

I think that an impending Obama win contributed somewhat to the meltdown in October and November, but Obama gets the credit for almost all of the meltdown in Feb. and early March.

Unknown said...

Scott, what is a "sell discipline" anyway...just another way to say market didn't time the market and you don't have to. If you have a diversified equity portfolio, low to no debt, cash reserves for about 18 months you will be fine. Every downturn is temporary...that is what people forget during emotional times. The people that "lose" are the ones that sold their stocks to me at the March bottom and there were hundreds of thousands of "long-term investors" that sold during the panic low!!!