Categorized | economy, happenings

Good news in the housing starts numbers?

According to The Curious Capitalist, David Rosenberg, the telegenic Merrill Lynch economist, claims there’s good news buried in the housing starts numbers for January:

The Commerce Department reported that construction of single-family homes decreased to an annualized 347,000 last month. Rosenberg shaves about 30% off that number in order to exclude people who are signing up to build houses on land they already own (as opposed to entering the market for the first time). That gets him to an adjusted level of 245,000 single-family starts, which is below December’s new home sales rate of 330,000.

The catch is that we’ve still got all those extra homes sitting around, and it’ll take a while to work through the inventory, kind of an important part of stabilizing home prices overall. Rosenberg figures that if starts and sales stay at their current levels, we’ll get back to a healthy equilibrium in about 13 years. And that even if starts go to zero, it would still take two years to burn off excess inventory.

So let’s hope demand picks up a little. It should. Rosenberg figures that underlying demographic trends would put demand at 520,000 units annually—quite a bit more than the 330,000 we saw in December. Of course, no one necessarily thinks that correction will happen quickly. Rosenberg writes that he’s “extremely confident” that the average price of a home nationwide has got to drop 15% more before we hit bottom.

A little trip in the way-back machine: Here’s David Rosenberg answering Susie Gharib’s question about unemployment on the Nightly Business Report back on August 8:

GHARIB: Tell us about the job market. When do you see businesses ramping up to hire again?

ROSENBERG: We can see housing bottom out and we have to see the credit situation improve. And then we’re going to start to see the hiring. And I expect that is going to be a 2010 story. I don’t think it’s going to be a 2009 story.

So we have a simple quantifiable fact: fewer new houses meant to be sold on the marketplace were built than houses sold in January, the first time this has happened since housing prices started slipping and sliding down the price hill.

That numerical fact is a good thing, but it was also inevitable. It does not in itself answer the question when housing prices will bottom out and how far down that bottom is. That question is the million dollar question behind the bigger question every entrepreneur and small business owner is wondering about from breakfast to bed: when will the economy recover?

Now, David Rosenberg is an award-winning economist and I, as I’m always quick to point out, am a nothing-winning non-economist, but I think we’ve got farther to fall than 15% — maybe as much as another 25%, and we won’t see the bottom until well into 2010.

There are simply other “number facts” that Rosenberg isn’t including. First, although housing prices have declined remarkably, they haven’t declined that much. Let’s look at the numbers straight from the horse’s mouth (the Standard & Poor’s Case/Schiller horse, to be exact) showing the drop in prices:

Case/Schiller Housing Price Index median home price graph

In the most simplistic analysis possible, the million dollar question is how much of that precipitious rise in housing prices after 1996 is “housing bubble”? Because the big pop in the housing bubble was accompanied by arguably an even bigger pop in the mortgage industry, then housing prices will have to settle to point where both are in equilibrium. Will that be 2004 prices (which is the current “price” of a home)? Will that bottom be 2003 prices (a further 15% drop, which is what Rosenberg is predicting). Or 2002 prices (a further 20% drop, which is what ISI is predicting)? In other words, if there had been no “bubble,” would housing prices have faithfully marched up a hill that would have ended in 2003 or 2002 prices sometime around now, rather than having reached those prices in 2002 or 2003?

In this case, another significant number is the relationship between median home prices and median family incomes. In these numbers, median home prices remained pretty steadily at 2.8 times median family income until 2000 (which argues that the bubble started in 2000). At that point, the relationship climbs at vertiginous speeds to over 4 (meaning that the median home price was four times the median family income). By this reckoning, as of the end of January, 2009, the median home price has fallen to 3.2 times median family income, about a 57% drop in the relative measure and the same relationship that held in 2003. But the measure is still 15% higher than it was in 2000.

But although median home prices are “normally” 2.8 times median family income, that’s not necessarily true in times of high unemployment. In those times, 2.4 or 2.5 is more “normal.” What’s key is this: if you start asking questions about how much of housing decline is simply clearing out price gains that were the result of the housing and credit bubble, then the most important measure of where housing prices can go is “affordable.” That’s a vague measure, but it seems to historically hover around 2.8 times median income. But “affordable” is a moving target — in a recession, “affordable” is a considerably lower number than it is in times nearing full employment. This is what Rosenberg is missing, I believe.

Rosenberg is also not calculating how much of current demand is being driven by the bottom of the market: the foreclosure market. Many of these properties are being bought up by investors at prices far below market (prices approaching 1997 levels) and are being converted to rental units. (I know this feelingly since many of my clients are snatching up properties here in LA at 1997 and 1998 prices.) How reliable are housing demand numbers in the midst of a “clearance sale” in a large part of the market?

I, on the other hand, believe that the most optimistic “bottom” will involve another 25% drop in housing prices to something closer to 2001 prices — given massive federal efforts to stabilize prices. The drop could be as great as 35% (1997 levels) if unemployment numbers drive dramatically upwards and become hard to move. In other words, in Rosenberg’s book, unemployment was caused by the sharp decline in housing prices. That’s true, but it’s now history. Now we’re seeing housing prices coming down in part because of unemployment. Simply put, I don’t see housing prices bottoming out until we at least achieve a ratio of median home prices to median family income of less than 2.9. Probably lower, unless the government started buying houses for us. Which is an option.

I see housing starts (controlling for new homes not being built for the marketplace) dropping to 20% of demand before the train starts moving down a different track. We’re not far from that point.

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2 Responses to “Good news in the housing starts numbers?”

  1. Our January Housing numbers here in Tallahassee had nothing good “buried….” , hang in there!


  1. […] is still massively overpriced and can come down much further, at least to 2002 or 2001 levels to bring the median price of a house more in line with income (about 2.8 times). Since we’ve been measuring, this ratio (2.8) seems to be a natural […]

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