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business newsReal or Ridiculous? Housing Starts
Few figures are as crucial to forecasting the direction of the US economy.
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Housing starts -- the number of new residential construction projects begun in a given month -- have averaged between 500,000 and 600,000 annualized units over the past year. Last month, housing starts jumped to 591,000 annualized units, up from 575,000 in December. While some economists have interpreted the uptick as a sign of economic recovery, current housing starts are still hovering at all-time lows: New construction has held steady at roughly a quarter of what it was in January of 2006, at the height of the most recent housing bubble. At that time, housing starts hit 2,273,000 annualized units.
There were several factors contributing to that 2006 high, says Gus Faucher, director of macroeconomics at Moody's Economy.com. From the mid-1990s to the mid-2000s, housing construction outpaced market demand. Americans were eager to tear down old homes to rebuild, and many even took on second homes. In response, building developers such as Pulte Homes (PHM), Lennar Corporation (LEN), and NVR (NVR) saw the bubble rising, and rushed to get their homes on the market before competitors, thus driving up the housing starts indicator.
"The supply of newly constructed homes got way ahead of demand," Faucher tells Minyanville. "While economists didn't necessarily predict a recession would result from a housing market downturn, we knew as early as 2005 that too much inventory on the supply side would result in slowed growth."
Growth in the housing market did indeed slow through the three years following the January 2006 high. Housing starts fell 38% to 1,409,000 between January 2006 and January 2007, then an additional 23% to 1,083,000 between January 2007 and January 2008, proving that this leading indicator did foreshadow the current downturn.
Now, as the supply and demand of the housing market balances out, prices are falling on brand new and barely used homes in states that had the most overgrowth like Florida, Arizona, and California.
"The recent improvement in housing starts does show some firming in the housing market," says Tara Sinclair, assistant professor of economics and international affairs at the George Washington University. "However, it's still unclear how overbuilt we are in private housing and how long it will take for prices to drop to a point where a significant amount of new construction is warranted."
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