Notes from Jim Haughey

Mar 20 2007 12:33PM | Permalink | Email this | Comments (1) |
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By Jim Haughey

Februarys’ housing report suggests that permits and housing starts are near the bottom in this building cycle after a year of gradually adjusting to the new, lower level of home demand, stripped of most speculative buyers at the top of the market and most buyers at the bottom of the market who need a subsidized mortgage. Housing starts rebounded 9% to a 1.525 million unit annual pace in February, while permits slipped 39,000 units lower to 1.532 million.

The current level 1.5 million plus level of permits and starts is likely slightly above current demand for new homes so further small declines in the next few months are possible. But not certain. Market conditions are still too uncertain to be sure if demand for homes is now rising or falling. But it will be rising soon, driven by improving affordability and more stable housing market conditions, even if this is bad news.

While the downturn is over or soon will be over at the front end (starts) of the housing market, it has not yet worked its way through the market to home sales. There were still 1.211 million homes under construction in February, down only 9,000 from January and off only 213,000 from a year ago. This surplus of homes under construction is a restraint on additional housing starts. The surplus will be worked off very slowly since it is so heavily concentrated in South Florida, Arizona and Nevada. The surplus is slim or nonexistent in most housing markets.

The best news in the February housing report was that housing completions plunged 172,000 to a 1.664 million annual rate. This is about 150,000 higher than the current demand for new homes. Homebuilders are still adding to the surplus of homes for sale, although now at a much slower pace. This situation is expected to persist well into 2007. Then the surplus will be shrinking though 2008, but still depressing home prices, builders’ margins and the margins of all suppliers to the housing industry.

Very little of the above applies to the housing market in the Midwest where the largest drop in housing starts is occurring. Starts declined 20% last year in the Midwest and are forecast to fall 25% more in 2007. The Midwest is enduring a “traditional” housing recession caused by job and income losses and the fear that cuts in jobs, work hours and supplemental income will spread to households with more job seniority or with jobs in local service industries. The situation is worst in Michigan and Ohio. It is 2002 again in the Midwest. Clearing out the surplus of homes for sale will not boost new starts in this region. The fundamental problems with affordability and confidence have to be fixed. And that will take longer that absorbing the surplus inventory.