Wednesday, March 16, 2011

More good news for US Housing Market

Latest report on US housing shows that housing starts are at the 2nd lowest they have been in 50 years of data.

This is good news for housing, I argue, since prices cannot stop falling until inventory and demand equalize.
Fewer new homes being built means that with ongoing household formation of around 800k-1000k per year, there should be absorbtion of 400-600k homes per year.  That will bring supply and demand more into alignment.

The news folks, of course, suggest that this is terrible news for housing, but they also though the news in 2006 was good for housing, when clearly it was bearish.

I think we will finally hit a bottom in Q1 of 2012.  We might scrape it for a while, as housing starts and household formation may coincide and keep prices from rising, but lower prices are actually a good thing, since it means that housing is becoming more affordable.  We can only hope that prices stay muted for an extended period.


  1. Of course its a good news for all. But I hope it should not affect the price. It is the expectation of all that price stay mute for some time,but how far it may go lets see.

  2. In the short term, of course, inventory remains high, so prices will continue to fall. But prices will only stop falling when the excess inventory is absorbed. Smaller amounts of new stock entering the market help to ensure positive absorbtion of the inventory (of course, some markets, like Las Vegas, may never have enough demand to absorb all of the inventory.)

    One could argue that higher prices are BAD for housing. Normally, we think of ourselves as consumers of goods, so we cheer when prices fall. Look at the positive spin the media put on falling gas prices. No one complains that sellers of petroleum will see a lower surplus.

    With housing, people tend to see themselves as net providers of housing (that is, they don't consume housing, they plan to sell it - someday). So much like the financial markets, people cheer when prices rise. Ironically, when it comes to the "intrinsic" value of the house - it's rental income or equivalent - people see increases as bad.

    For myself, I recognize that a major problem for economies everywhere is household balance sheets, which are overleveraged. If the assets against which that leverage is secured rise, it will help reduce the strain on those households and possibly enable them to return to more nomalized spending habits. Quite frankly, I cannot see the economy improving until this happens.