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AM Economics: Housing starts, Mr. Market has it backwards

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January 22, 2009 – Comments (7)

 

The Commerce Department published the December housing starts number today.  Housing starts dropped 15.5% to a "seasonally adjusted" (HAHAHA) annual rate of 550,000 units.  This is obviously a bad number.  How bad?  It's the lowest number of housing starts ever reported since the government started tracking them back in 1959.

Mr. Market definitely did not like this news.  Immediately after the number was published, the S&P futures fell from negative 6 to negative 10.  I realize that a low number of housing starts is an indication that the economy and the housing market are a mess, but if you haven't figured out by now then you have no business investing for yourself. 

I personally view the low housing starts number as a very good thing.  Here's why.  The inventory of unsold homes is way too high right now.  Basic economics dictates that if there is greater supply of something than there is demand for it, prices will fall.  We need to begin to whittle away at the excess inventory that's out there.  Many economists believe that any housing starts number that is below 600,000 will enable inventory to drop.

Builders need to STOP BUILDING NEW HOMES ALREADY!!!!  I realize that's what they do, but home prices are not going to stop falling until the inventory situation gets under control. 

If word came out that OPEC's production of oil slowed dramatically, the commodities market would rejoice and the price of oil would rise.  However, when a report is published stating that the supply of new homes coming onto the market has slowed, Mr. Market boos.  Home prices will never stabilize until the excess supply is worked off.  The economy will never recover until home prices find a bottom.  The stabilization of home prices will alleviate some of the banking problems because it will slow the decline in the value of assets on banks' books and it will stop the erosion of wealth that has been hammering consumer spending. 

This is good news my friends, not bad...unless you are foolish enough to be a shareholder of a homebuilder right now (in which case you get what you deserve).

Housing Starts, Permits Hit Record Low in December

Deej

7 Comments – Post Your Own

#1) On January 22, 2009 at 10:02 AM, JakilaTheHun (99.94) wrote:

I don't know --- my personal belief is that home values should reflect, to a large extent, the value of the inputs --- with a minor premium placed on other convenience factors such as location, security, etc.  Are homebuilders still able to make a profit by selling at lower prices?  If so, maybe it wouldn't be such a horrible thing to see them continue building and for prices to keep dropping. 

To me, the bigger issue is that housing should become affordable again to middle-income individuals without sacrificing an arm and a leg.  "Inflated housing markets" do not benefit consumers in the long-run, so if housing can still be built profitably at lower prices, then why shouldn't we cheer for lower prices? 

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#2) On January 22, 2009 at 10:12 AM, anchak (99.85) wrote:

I wish I could rec this more than once!

Its a necessary evil - if you want to see it that way. Honestly I personally think its time FBs call come to fruition and all the red thumbed HBs go kaput!

There's some cleansing required before we pick ourselves up again

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#3) On January 22, 2009 at 10:42 AM, TMFDeej (99.40) wrote:

Hunley, as a homeowner I have to respectfully disagree with you that it would be a good thing if housing prices continue to fall ;).

Deej aka someone who doesn't like seeing the value of the home that he purchased five or so years ago continue to fall.

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#4) On January 22, 2009 at 3:28 PM, DemonDoug (82.98) wrote:

you bought at an inflated price deej.  no different than buying CBI at 30+.  Don't get emotional about it.  A home is a place to live, not an investment anyway, but if you are losing money on the deal, mail in the keys, and buy your next door neighbor's home for half the price.

btw there are something like 18 million vacant homes, and 4 milliion for sale.  It's something like a 5-10 year supply.  You are right - we don't need any more homes.

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#5) On January 22, 2009 at 4:05 PM, ocsurf (< 20) wrote:

Well said Deej.....I'd like to hear Floridabuilder's reaction to this one.

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#6) On January 22, 2009 at 4:25 PM, TMFDeej (99.40) wrote:

It's not a question about being emotional, Doug.  I am very glad that I purchased the home that I did.  I feel as though it is extremely important for children to have a home that they feel safe in.  I was afforded that luxury as a child and I am passing it on to my two kids.

I love my neighborhood and I have made a ton of friends.  The last thing that I would have wanted to do is move all over the place.  That's not fun for anyone, especially children.  I have no remorse about buying the house that I did.

Besides, I am somewhat insulated from the fall on a number of levels.  For one, I pocketed a huge gain on my condo when I sold it.  Two, I was in the right place at the right time and I got what at the time was an outstanding deal on my house.  Three I made a huge down payment so I'm not even close to being underwater.

Having said all of this, it still would be nice if the value of my most expensive asset wasn't falling so rapidly.  Hopefully, the government will be successful in its efforts to hammer mortgage rates down into the mid 4s.  If so, I'll lock in that historically low rate and sit on it (I'm at 5.75% right now).

Mailing in the keys and buying a cheaper house is an inappropriate response.  I made a commitment and I will live up to it.  I personally have a problem with anyone who just walks away debt in anything but the most dire circumstances.  People shouldn't be able to do that.  The debt should either follow them around forever or it should be virtually impossible for them to ever get a loan again.

Deej

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#7) On January 22, 2009 at 9:37 PM, falang1 (96.34) wrote:

Nice post.  I agree lower housing starts is a good thing.  Please stop building!! 

However if banks are being allowed to "walk away" from their debts with government bailouts, shouldn't the little guy be able to do the same thing?

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