Interest Rate Roundup

Friday, November 17, 2006

Housing starts disaster

I hope you caught CNBC this morning right after the housing starts and building permits news came out. I had a chance to discuss the numbers on the air. Let's not mince words -- they were Ugly, with a capital "U.":

* Housing starts plunged 14.6% to a six-year low of 1.49 million units (Seasonally Adjusted Annual Rate) in October

* Building permits tanked to 1.54 million units, the ninth straight decline. Permit issuance is running at its lowest level since December 1997.

* Forecasts called for a 1.68 million pace for starts, so we obviously missed the forecast by a country mile.

What's going on? People are underestimating the MAGNITUDE of the oversupply glut we have.

We had 573,000 new homes on the market at the July 2006 recent peak. That's a roughly 85% rise in supply over the past five years. You know how much we've come down since then? 2.8%. And that's with new home prices dropping almost 10%, their biggest YOY fall in 36 years.

Existing home supply is also off the charts. While it has come down for a couple months, the decline is about the same magnitude as the decline in the new home market -- a pittance. Here's something else to consider: This small drop may be nothing more than a normal, seasonal event. People who don't sell in the spring and summer often pull their homes from the market in the winter time. This inventory pattern shows up year-in and year-out in the existing home market. When spring rolls around, inventory spikes again.

My view is that we have more downside work in starts -- and also in home prices. It's going to take time ... LOTS of time ... plus lower interest rates and decent job and economic growth to work through this housing bust. If things don't go just right (i.e. no recession, no further tightening in mortgage credit availability), we could have serious another leg down. At the very least, I expect 2007 to feature weak sales, flat-to-falling prices, more foreclosures and delinquencies, and rising inventory again in the spring.

Incidentally, local foreclosures continue to climb in my neck of the woods. I discussed this with a couple of local reporters recently. You can read the pieces in the Palm Beach Post and Sun-Sentinel, if you like.


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