A "V" Shaped Housing Recovery Begins to Take Shape

With March data from the Census Bureau' s New Residential Housing Index and New Home Sales, we can begin to see the formation of a "V" shaped recovery in the housing market. Our economy is slowly building strength and momentum, and employment will begin to increase. This will lead to increased housing demand from new household formation. As "pent up demand" from young people living with their parents, and divorced couples living together lead to new household formation, "shadow inventory" should be reduced or eliminated. Many of the houses counted in "new homes for sale" are now bank owned, and many are in disrepair or are uninhabitable. Additionally, most of the true bargains are gone, and the prices of homes are going up. People tend to put off purchases as prices fall, and tend to accelerate purchases as prices rise. All of these factors together should combine to give real underlying strength to the housing recovery.

October New Residential Construction Commentary

The above graph is a visual representation of the Seasonally Adjusted New Residential Construction & Sales data through October 2008. The lines represent Total Permits and Starts, Single Family Permits and Starts, Single Family Units Sold, Total Under Construction and Single Family Under Construction. It is worth noting that there have been several construction downturns since 1959, and that we are at levels that have triggered recovery in all of the past housing downturns.

Looking at Starts only, we see that Total Starts are the lowest they have been before beginning recovery, and Single Family starts are within a few thousand units of the lowest they have been before beginning to recover. Based on the permits we have see in the Atlanta area, November may give us new lows for all aspects of residential construction. Lumber and Panel prices are at or below sustainable levels, with many lumber items at multi-decade lows.

There are several unknowns at this point. Although the quantity of Single Family Homes for Sale is the lowest it has been since May, 2004, there is a 9.1 month supply available. Our economy is probably in a recession, and people don't tend to think about buying a home during a recession.

Capacity for single family residential construction continues to fall as builders, building material product suppliers, and lumber and panel mills continue to downsize or shutdown completely.

U. S. Housing Starts

The U. S. Department of Housing and Urban Development released the new residential construction statistics for August 2008 on September 17. 2008. Total starts declined to
a seasonally adjusted annual rate of 895,000; which is 6.2 percent below the July estimate of 954,000 and is 33.1 percent below the revised August 2007 rate of 1,337,000. Single family starts declined to 630,000. This represents a 1.9 percent decrease from the July figure of 642,000; and a 34.9% decrease from August 2007.

Historically, starts have decreased to a seasonally adjusted range between 904,000 and 791,000 before rebounds have occured. The starts figure from August puts us within that channel. While most consider a decline in starts and permits to be a negative leading indicator, a slightly longer term perspective might tell us that construction in the housing market is approaching a point that is unsustainable, given normal increases in population and attrition of housing units overall. In other words, there are not enough houses being built to satisfy long term demand.

Both total starts and single family starts (SF) have decreased to the range that has been unsustainable in the past. This could mean that the housing market is close to recovering. A housing recovery should help improve the entire U. S. economy.

A large amount of capacity for single family residential construction has been removed. This includes lumber and panel mills which have been temporarily or permantly closed, building material product suppliers that have reduced locations and personnel, and builders that have downsized or ceased to exist. A small increase in demand for new homes could overwhelm the existing supply chain.

-Reid Adams
Cofer/Adams Building Center, Inc.