Housing Starts/Completions Signals Bottom Not Growth ~ Steve Blitz Morning Notes
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Thursday, September 17, 2009

Housing Starts/Completions Signals Bottom Not Growth

The single-family home implosion kicked-off the "Great Recession" and it appears that the collapse is over based on the ratio of starts to completions (see chart). This will be another factor helping GDP turn in a positive growth number in the current quarter. Unfortunately the boost is unlikely to carry through into the final three months of the year.

Behind the implosion was an extraordinary excess of building driven by demand levels pulled from the future and pushed by too-cheap credit. It couldn't last forever and it didn't and builders went over the cliff. Housing cycles by nature are inventory driven. Down cycles consequently see starts below completions and the end is signaled when starts and completions move back to balance. As the chart below indicates, this is where we are and it also has generally coincided with a recession's end.

But this housing cycle is different. In the past, housing demand fell off because of weak income and falling employment. The recession consequently built pent-up demand for homes that was unleashed when the economy turned. This time around future demand was satisfied before its time and those that lost their homes because they bought too early in their life-cycle are unlikely to be getting a mortgage in the near future. The consequence is that the current downturn isn't building unsatisfied demand for new homes -- it is only getting the demographic supply/demand equation back into some normal cyclical balance. Starts will, of course, stay low enough long enough for pent-up demand to build and eventually push the housing cycle forward. The key is knowing when pent-up demand is exceeding available inventory by enough to kick-off a new cycle in building.

Given that the housing industry appears to have finally gotten starts in line with demand, it will still be a while before pent-up demand builds. At least the first part of the housing correction is now completed. For real GDP growth this means an add to the 3rd quarter but the boost from housing is unlikely to carry forward and help 4th quarter GDP turn in a positive number.

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