Housing Starts
I am otherwise jammed up, so I didn't get a chance to take apart the Housing Starts data -- but damn! if these two charts (via Merrill's David Rosenberg) don't tell the entire story:
>
We’ve come a long way... 
...but barely dented inventory stockpile
Charts via Census Bureau, Merrill Lynch
Tuesday, August 19, 2008 | 02:30 PM | Permalink
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Homebuilding still to high for comfort
Housing starts dipped back below the one million mark in July. However, we believe they need to go a lot lower than that to whittle the inventory of unsold homes down to a more manageable level. With credit conditions still tight, and likely getting tighter judging from the Fed’s latest Senior Loan Officer Survey, there is little hope on the horizon for an up-tick in sales. Thus, home building needs to contract by another 30%, to below 700k and stay in that range through at least the end of 2009 in order to get months’ supply down, in our view.
A wall of homes for sale entering the market in July
Housing starts declined to 965k in July, from an upwardly revised 1084k in June, about in line with expectations. The numbers thus are about in line with our 3Q GDP tracking. The more forward-looking permits fell to 937k in July suggesting further downdraft in starts in the months ahead. Housing completions remained elevated at 1035k in July (791k singles and 244k multi units), which will not help the supply situation and continue to be a source of downward pressure on prices.
Months’ supply to drop to 9.4 in July
Single starts dropped to 641k in July, the lowest since January 1991, but even this is well ahead of the pace of sales. So, we believe the number must fall significantly lower to address the inventory situation. Given our expectation for sales to decline by 1% in July to 411k units, we expect months’ supply to drop to 9.4 months from 10.4 in June. As expected, multi starts dropped by 23% MoM in July to 341k from 424k in June. The June number had been boosted by a rash of activity ahead of a building code change in the New York City area.
Posted by: David Rosenberg | Aug 19, 2008 2:34:33 PM
Why oh why oh why must these graphs always be truncated?
Posted by: Andy McKenzie | Aug 19, 2008 3:04:01 PM
Looks like a bottom to me!!!! (wink wink)
Posted by: Rob P | Aug 19, 2008 3:06:11 PM
Wow, those are some charts. What else is there to say?
David, you are correct, and BR posted on this several weeks ago, the 1mm decline in starts number seems meaningless given the increases we have seen over the last few years. In the past this seemed like a bottom indicator but the size of this expansion has made that figure out of date.
I look forward to reading some of your input in the next RIC report.
Posted by: ben | Aug 19, 2008 3:09:02 PM
Simplest, most accurate analysis--and the market woke up!
Rob P, I think bottoms don't occur at intersections, but typical at points of massive overrun, IMHO. So, hold on to your hat I think the ride is just beginning.
Posted by: Bill Rice | Aug 19, 2008 3:33:24 PM
Cramer, Cramer, Cramer...
You are an entertainer and a trader...
NOT an investor...
Good thing you are not in charge of a hedge fund here....
Bruce in Tennessee
Posted by: Bruce | Aug 19, 2008 3:41:12 PM
The graph is incomplete: Please put an arrow showing where Greenspan retired. ;)
Posted by: IdahoSpud | Aug 19, 2008 3:55:01 PM
I noticed today that at google finance that you can no longer look at the DJI S&P and NASDAQ at 1 and 3 day intervals like you used to. 1 month is now the minimum interval.
Anyone know why?
http://finance.google.com/finance?q=INDEXDJX:.DJI%20INDEXNASDAQ:.IXIC%20INDEXSP:.INX
Posted by: Pete | Aug 19, 2008 4:02:03 PM
Barry- Can you overlay the two charts? It appears from the naked eye that lows on the housing starts coincide w/ the highs on the months supply. Sans the tight credit conditions, that would imply a bottom no?
Posted by: David | Aug 19, 2008 5:30:26 PM
My prediction: before this even begins to be done in the wash we eclipse the lows on starts from ’82 and ’91 and go below 500 in ‘09; AND the inventory stockpile stays stubbornly elevated (above 7) until 2010.
Posted by: Todd M | Aug 19, 2008 6:01:52 PM
Rob,
"Looks like a bottom to me!!!! (wink wink)"
Ah, we should all be Yunified.
.
Posted by: VJ | Aug 19, 2008 7:12:14 PM
I'm going to throw out my own prediction as a supplement to Todd's: Would anyone (who reads this blog, at least) be shocked to see a 16 month home inventory within a year? Only now (recently in the Economist, for example) has there begun the slightest rumbling regarding the cascade of Option ARMS that are resetting over the next three years. Subprime, schmubprime. Ya ain't seen nothin' yet. It's all good though - I'm sure the market has priced it all in since it's "known information"...at least, that what the Pom Poms (i.e. - permabulls) keep insisting. Would someone please define for me the following: When is "known information" truly known and priced into the market?
I really view the market as a spoiled child. It might know you're going to take the toy away "6 months" in advance, but it doesn't throw a tantrum until the minute the toy is removed from the hands. Market: "What?! Another bank is going under?! Goldman has to write down 12B?! NOW I'M UPSET! "Six months ahead" my a$$.
Posted by: Kevin B | Aug 19, 2008 8:12:49 PM
Don't worry about the housing market, folks, Fannie Mae is going to come to the rescue.
How you ask? Why, by doing the same thing that got us to this point in the first place.
Today, I kid you not, I received a telemarketing call from Fannie Mae offering me a mortgage, even if I had no credit or bad credit.
It was a recorded message and I didn't stay on the line long enough to learn how to proceed if I was interested, but I should have just for research purposes.
Instead, I was laughing hysterically at the thought of Fannie promoting subprime mortgages while currently losing hundreds of billions on such loans.
There should be no bailout for these fools, only liquidation.
Posted by: Dogwood | Aug 19, 2008 8:59:00 PM
A bunch of perma bears on here, preaching to the choir. look at that chart agian, what on that chart doesnt scream out bottom?
Posted by: BigMoney Grip | Aug 19, 2008 10:17:15 PM
Dogwood
What the charts do not show is the huge phantom inventory that lenders have that they are keeping off the books and market. In my market in south Georgia only 35 homes sold and there were 70 forclosures in July. Typicaly we sell 250 homes a month in this market. There are over 2000 homes listed for sale in the market as well. This is in an area with job growth. Lenders are locked up and loans only to those with perfect credit.
Posted by: Mr Peabody | Aug 19, 2008 11:36:38 PM
I'd like to see the housing start chart redone on a population-adjusted basis, ie starts per million population. This would show a dramatically lower number than at any time in the past.
Posted by: adam | Aug 20, 2008 1:22:56 AM
There is no bottom.... yet.
Remember, these are housing starts. Quite a few starts will be projects that are already permitted and funded. Just because banks are clamping down now, that does not mean that many projects have already gotten the loans.
If you notice a trend, building booms reach max speed near the end of a bubble. Developers and their ilk are always late on the draw. Come to think of it, typically any industry is late on the draw since they analyze past trends to make future predictions... they almost never use data collected on the streets in real-time to make decisions.
That being said, we notice the banks are beginning to clamp down and will over-correct. Same will follow suit for builders. Of course, by that point only few will qualify for a mortgage, and many more will have lost their homes. Not to mention the ever-increasing unemployment and rising prices.
What I'm getting at, is that the bigger the bubble, the bigger the correction. While housing, specifically will reach equilibrium within a year or two, that won't signal a comeback.
We won't have a comeback until the other wounds to the economy have healed. Tighter loaning practices may well linger a generation (if banks at least temporarily learn their lesson). People will be forced to cut back and save... which will in time put many in position to buy again.
There is no magic indicator or sign that there is a bottom. We'll only fully recognize it once we're on the upswing again.
Time heals all wounds, even economic ones.
Posted by: CROMLETCH | Aug 20, 2008 2:23:27 AM
Mr. Peabody,
Thanks for the info, but it should be addressed to Big Money Grip, who made the comment on permabears.
Still interesting info, though.
I wonder how many people want to sell their homes but have chosen not to at this time due to market weakness.
The "want to sell but can't or won't" group could also depress the inventory numbers.
Posted by: Dogwood | Aug 20, 2008 8:23:21 AM
What makes deflation so dangerous is that buyers form expectations for lower prices in the future. The rational response is to defer purchases as they wait for lower prices. That's what has been happening in housing the past 2-3 years.
That's why I don't like the "months supply" metric. It projects currents sales rates into the future. But once prices bottom, purchasing behavior could change as people who have deferred purchases finally get the confidence to buy.
But price is only one factor to consider. Unfortunately, other equally important variables that matter such as the state of the labor market, incomes, mortgage rates, mortgage availability, etc. are all going in the wrong direction.
Posted by: Groty | Aug 20, 2008 10:40:18 AM
And therein lies another side-effect of the boom. People who were unable or unwilling to buy will keep waiting and waiting as long as they're sure they can buy a house for less.
Which is precisely why, among other reasons stated, we won't recognize the bottom till it passes.
Posted by: CROMLETCH | Aug 20, 2008 8:02:54 PM
