Notes from Jim Haughey

May 18 2007 8:44AM | Permalink | Email this | Comments (0) |
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By Jim Haughey

Housing starts increased for the third month in April, edging up 2.5% to 1.528 million. Starts have now risen 8.9% since their low point in January. But it is too soon to conclude that a sustained recovery in starts is underway. Starts are now the same as completions but completions are too high for the current level of sales. And the inventory of homes for sale remains bloated.

The housing market is still out of equilibrium. Either sales have to jump sharply or completions have to be cut back which would quickly pass back to a reduction in starts. April’s 8.9% plunge in permits to 1.429 million may be suggesting that a starts rollback is soon ahead. Reed Construction Data expects starts to average near the April level well into the summer before a sustained pickup begins. This will give home sales enough time to increase and substantially reduced the current inventory excess. Expect starts to bounce about with any clear trend for several more months.

Nonetheless, the strength in housing starts in the last three months confirms out view that housing downturn is essentially over at the front end of the market — permits and starts — even though more decline at the tail end of the market — home prices and services related to home sales. The sales decline is over for supplies and services used early in the homebuilding process with some recovery by year end. But recovery will be 3-5 months later for supplies and services used later in the building process.

Pre-construction services are an exception. Development, site work, financing and design are driven as much by the number of new subdivisions as by the number of new homes. Development plans are being scrapped or delayed until current developments can be built out and sold.

The financial press will consider housing to be a troubled market for several more years. Their measuring stick is sales volume, corporate profit margins and the prices realized for home components and completed homes. These will remain well below the peak levels reached early in 2006 for several years until the recovery in home demand and reductions in home construction capacity combine to push margins back to early 2006 peak.