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Housing Starts Up, Problematic Short-term Perspectives on Housing Also Rise

Anthony Randazzo
March 20, 2012, 10:39am

It's time for our regular broken record feature where we highlight short-term thinking on housing. Today we have a March Commerce Department Housing Starts Edition.

The Commerce Department released data for March 2012 showing that in February, home builders broke ground on enough homes to maintain a 698,000 annual pace of building. "Housing starts in the U.S. hovered in February near a three-year high and building permits rose, adding to signs that the industry at the heart of the last financial crisis is stabilizing," according to a Bloomberg article.

That same article went on to cite a number of positive analyses of the data, including some of these classics:

“The housing market continues to recover at a very gradual rate,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, who forecast a 697,000 pace for housing starts. “The increase in permits likely flags further strength in the months ahead.” [...]

We have the wind at our back as the economy recovers and housing improves,” Sheree Bargabos, president of roofing and asphalt at the Toledo, Ohio-based company, said on a March 9 conference call. [...]

“Growth is anticipated as the housing market recovers, driven by home affordability, improving home values and home remodeling activity.”Paul Hylbert, chairman of Kodiak Building Partners in Denver, Colorado, a building materials supplier, said “business is definitely picking up. We are on the road to recovery.”

It continues to baffle me that these analysts feel the need to be so positive. Especially when the housing market has a collective pile of bricks hanging over its head. Here are four quick points to think about:

First, the Fed’s quantitative easing has led to today’s historic lows for mortgage rates, but now they pretty much can only go up, meaning the future will have increasingly hard downward pressure on housing prices as interest rate eventually increase from zero. 

Second, the shadow inventory of homes is still very high. A recent estimate put it at 9.8 million homes unsold or pending in foreclosure. That is more downward pressure on prices in the coming years as the homes reach the market.

Third, housing prices have finally fallen to where they should be based on a historical trend. But while this is a good thing, it does not mean we’ve reached the bottom of this price decline. In addition to eventually increasing mortgage rates and the shadow inventory, every housing bubble since WWII has seen prices dip below the historical trend line average for a few years before sweeping back up to prices that are more the norm. 

The final thing to consider is that household debt is still very high and savings are low. The dark side of interest rates at zero percent is that there is little point in saving, and higher incentives for keeping, adding, or refinancing debt. As a result, household debt, which is preventing a lot of consumption in the economy, has only deleveraged to 2007 levels—meaning there are years left of household debt deleveraging to get through.

All of this would suggest that we have at least a few years left before housing prices begin to climb again and there is recovery in the housing system.


Anthony Randazzo is Director of Economic Research


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