Tuesday, October 19, 2010

Residential construction is in an upward trend

September housing starts exceeded expectations, and data from prior months were revised upwards. The pattern is becoming clearer with the passage of time: residential construction bottomed about 18 months ago, and the upward trend in this volatile series since early last year works out to a 14% annualized growth rate, which by itself is actually pretty impressive. For all the woes that still surround the industry, it remains the case that we have seen the worst and conditions are now improving, albeit erratically. We'll very likely to see substantial improvement over the next several years at least, given the depths to which activity sunk in 2008. I would note, of course, that residential construction now represents such a small part of GDP (about 2.5%) that the ups and downs of housing starts are going to have a very small impact on the overall economy no matter what direction the trend ends up heading.


Benjamin Cole said...

I am happy for the upward trend, but we are producing one-quarter the housing we did at the peak.

That's called a depression.

U.S. industrial production fell 0.2 percent in the latest month.

At some point, the recovery has to be classified as subpar, and we are getting to that point.

septizoniom said...

you are relentless in the mindless cheerleading. it really detracts from your good articles. too bad. not sure what your goal is in such mindlessness. a mystery.

Sisyphus said...


I echo the other comments. We are so far below even a normal market that you should be referring this as a "terrible, but not as catastrophic as last year"

Single Family Starts averaged 866K annualized from January 1960 to December 1999. From January 2000 to December 2006 it was 1,415K

The average over the last 24 months has been 444K, HALF the historical average and down 69%

The Industry has been nuked. No other way to describe it.

Benjamin Cole said...

Anecdote: I drove through Sante Fe Springs, an industrial burg south of LA, this weekend, looking for industrial roofing supplies.

Everything is for lease or sale--you couldn't find a space three years ago.

Ugly, ugly, ugly. Ain't no inflation in Sante Fe Springs.

I would say we will see huge deflation in six months unless we crack the whip.

I enjoy Scott Grannis' blog, and appreciate his point of view. I just have a different point of view.

Bill said...

It's the same story in Atlanta regarding vacancies, however, I fail to see how pumping a trillion dollars into the economy is going to cause this to improve. It seems to me that many of those businesses were opened with easy credit and folks bought whatever they were selling on easy credit as well. Do we really think QE2 is going to cause either banks or ordinary folks to start lending/buying a bunch of crap nobody really wanted in the first place?

Public Library said...

Well said Bill. Benji is probably waaaay long real estate somewhere in the US and needs/hopes more dollars equates to reversing psychology.

We will all learn once again the Fed is no better at manipulating human behavior to their liking than you or I.

Especially when trying to convinve 330mm people that the last time they doubled down on debt and cheap money it was just a fluke. This time they will surely make out like bandits.

Scott Grannis said...

Evil: It's the change on the margin that's important, not the level of housing starts. The economy and the markets have already absorbed the huge drop in starts, and I suspect the markets are expecting even more weakness.

Benjamin Cole said...

I don't know Atlanta, but the industrial space in SF Springs is good space, and had a use all of three years ago. I suspect most owners were prudent buyers, especially since industrial space takes a 20 percent down payment.

On QE2, I don't know if it will work or not, but it is worth trying. The Japan do-nothing model has not produced results in 20 years.

I do wish there was a way to shove money into the hands of middle-class Americans who would spend it and not bond holders, but right now QE2 is the only mechanism left (along with middle-class tax cuts).

Hey, if it were up to me, we would run a national lottery that paid out more than it brought in, and most winning numbers pay about $500.
Print the money--you get stimulus without taxes or deficits, and no moral hazard.

Inflation is well below desirable levels, so run the lottery until aggregate demand starts pushing up prices around 5 percent a year. Cut the lottery off a few years after that.

Oh, perhaps some people would make money without working, but our whole stock market designed that way (from the viewpoint of the retail investor).

Well, this is one idea we will not see in our lifetimes, but it is a great idea.

septizoniom said...

mr grannis: the change on the margin when you hit the ground after jumping out of an airplane is spectacular if you worry about rate of drop. but that change on the magin aint no good. throw off the rose color glasses and use you substantial writing skills to make gimlet-eyed and not cheerleading posts.

Public Library said...


Here is where you are wrong. Imprudent paper printing actually turned prudent businessmen into nothing more than lottery ticket holders.

The market signals such as risk, return, and time to recoup investments were all out of whack.

However, many 'prudent' men plunged over the cliff anyway because they were duped into believing the party could last forever. These were your SF Springs lot. Hardly prudent but given the incentives on the table, it was tough not taking a sip of the koolaid.

More money will not change anything for the better because a prudent businessman knows you cannot simply throw money at the problem...

Sisyphus said...

14% increase "at the margin" for annualized starts of 444K is an additional 65K (rounding up)

65,000 X $150,000 (Costs to complete from a permit) ~ whopping $10 Billion "Annualized" (again, rounding up)

Not much to get excited about in a 14 Trillion economy. About a 0.0715% increase in aggregate demand. Better than down 14% for sure

Benjamin Cole said...


There is a spooky chart in the above post of inflation rates in Japan and the USA. We seem to walking down the deflation road.

If so, sell your stocks and property now. You can buy them back for 25 cents on the dollar in 20 years.

John said...

Real estate sales, new and existing, are joined at the hip with jobs and wages. Here's the problem: The great disconnect of productivity from wages.


Scott Grannis said...

Re: parallels with Japan. In the years preceding Japan's great disinflation and subsequent flirting with deflation, the yen appreciated by an extraordinary amount, rising from 250/$ to 100/$. That alone would suffice for a forecast of deflation. Yet today the dollar has been depreciating strongly, having lost over one third of its value against other currencies since 2002. There is NO monetary parallel between Japan and the US that would predict deflation for the US.

John said...

Citigroup, Bank of America and JP Morgan Chase have all reported good third quarter earnings as well as improving credit trends. Their markets have not recovered but the improvement is there for those who wish to see it. As Scott says, the important thing is the change at the margin. It is getting better, not worse. Its slow, but the direction is unmistakable.

The real estate markets remain depressed. There is no doubt about that. However, for those shopping for properties, the environment is good. It is a buyers' market. Many do not hold the views of the pessimists who see depression forever. Money yields nothing in deposit accounts and it will not stay parked there indefinately. As time passes, competition will intensify for the better properties.

Its not cheerleading. Its called frontrunning. If you wait for everything to be obvious, the cherries will have already been picked.

Pragmatic Investor said...

Speaking of cherry picking, the blogger here is the best at doing that. Of the two pieces of housing data that came out today, he picked the one that supports his view. On the other hand, building permits data shows exactly the opposite picture and is forecasting poor housing starts data in the next few months since it's a leading indicator. But that's ok. If someone is wrong, Mr. market will punish him eventually.

David Leto said...

This is a very interesting chart. I assume its the average for the nation. Here in South Florida we pretty well are on our way to depression. I have 10 townhouses we are trying to sell and can't. The appraisal is 50% of our cost to build. The land and buildings are free and clear, so we are just treading water for the time being. We have enough cash to hold on. But here, Vegas and Arizona; our chart is not rising.

There is still a significant amount of construction, but only on the bones of belly up developers.