Tuesday, October 20, 2009

Implications of the feeble housing starts

The Commerce Department data showed that US private housing construction starts stalled on a month-to-month basis.

Source: Bloomberg/Commerce Dep.

Not surprisingly this spooked the US equity markets that were poised to rally this morning on positive earnings results. It's a subtle reminder that all is not necessarily well with this recovery.

One of the key reasons for the modest construction starts is lack of available credit. Construction is a capital intensive business. Stun by real estate exposure and undercapitalized, community banks are not lending to local construction companies the way they used to. And it may be a while before they are in a position to do this again. It also doesn't help that CIT has become incapacitated.

Since construction is a big driver of job creation in the current economy (as opposed to the old days when manufacturing was the driver of jobs), the weak starts number will likely translate into a worse than expected jobs results. That is in part why labor market recoveries have taken progressively longer in recent recessions.

Ironically this is not necessarily bad for housing price stability. Feeble construction starts allow the demographics to work through some of the existing inventory. We keep coming back to MIT's William Wheaton's analysis:
... most analysts foresee new household growth resuming to a level of at least 1 million by 2010 and beyond. If we conservatively add 200,000 demolitions per year, the US economy will “need” at least 1.25 million new units yearly in the near future. With today’s currently depressed construction, this generates a yearly deficit of 750,000 units. At that rate, the current excess inventory of units for sale or rent will be back below normal by 2011.

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