New Housing Starts — 10-Year Low
Kurt Brouwer August 16th, 2007
As we see over and over again, markets react to change. Some markets, such as stocks, react very quickly. Other markets, such as new construction of housing, react much more slowly to change. This is primarily due to the nature of the lead time between applying for a permit to build and actually getting the house done. In large-scale developments the lead time can be several years.
With home prices softening due to excess supply and weak demand, developers are moving quickly to slow down or even stop building new projects. Martin Crutsinger, AP Economics Writer, reports [emphasis added]:
‘Construction of new homes fell to the lowest level in more than a decade in July as builders continued to struggle with the steepest housing slump since 1991.
The Commerce Department reported Thursday that construction of new homes and apartments dropped 6.1 percent last month to a seasonally adjusted annual rate of 1.38 million units. That was down 20.9 percent from the pace of activity a year ago and represented the slowest pace since January 1997…
…Applications for building permits, considered a good barometer of future activity, fell by 2.8 percent in July to an annual rate of 1.373 million units.
Housing construction fell in all parts of the country except the Midwest which posted a 2.6 percent increase in July. Construction starts were down 11 percent in the South, 3.7 percent in the West and 1.3 percent in the Northeast.
The current housing slump is the worst since a downturn that occurred during an economic recession in 1990-91…’
The recession in 1990-91 was a relatively short and mild recession, yet it was a very tough time for home builders. We are not in a recession now nor are we likely to enter one anytime soon. However, for builders this is likely to be equally as bad as 1991. Why? The AP continues:
‘…”Builders realize that issues related to mortgage credit cost and availability have become more acute, filtering some prospective buyers out of the market and prompting others to delay their decision to purchase a home,” said Brian Catalde, a home builder from El Segundo, Calif., and the president of the home builders group’
What does this mean for the rest of us? First, as new home construction slows down, that sector will lay off workers. Fortunately, other sectors of the economy are strong so overall employment and job growth should remain pretty good.
The other factor–much bigger in my opinion–is that home values are falling in most markets except the Midwest. Essentially, we are seeing what may be a correction or even a longer and steeper downturn in home prices. As home values decline, then people’s perception of their wealth also goes down and that could affect behavior in many ways such as reduced consumer spending. If consumer spending slows down, economic growth will slow down also. So, this is an area we will be watching pretty closely.
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