Alstry vs. The Ecomomist on housing starts
July 17, 2009
– Comments (18)
Scott Grannis is a very highly respected Economist who writes an excellent economics blog at http://scottgrannis.blogspot.com/. Mr. Grannis is in the Larry Kudlow life is always Goldilox camp.
Scott posted this on today's increasing housing starts:
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.
For those of you that remember the epic Alstry vs. FB dialogues......my response may bring back memories, altough FB had a much better command of housing:
Scott,
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;)
Just as I thought I closed the door on Mr. Grannis by my response....he stated this:
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.
Not the right way???? The change on the margin????? I wasn't sure what margin he was talking about so I responded.......
Scott,
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.
After languishing for 9 months, the stocks of major home builders are now beginning to rise.
Scott,
Didn't the dot.com 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.
ALSTRY LOOKS FORWARD TO CHEERING........but based on the fact that states will likely make HUGE cuts to its budget, likely causing millions of job losses and wage cuts.....I think we have a way to go.
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