If You Build It, They Will Come…..And Did They Ever.

The country’s ill-fated push into creating an equity society was met with enthusiasm by the building industry. In the 20 years beginning in 1980, U.S. home starts have averaged just over 1.4 million per year. At the housing bubble’s zenith it reached over 2 million. In a particularly nasty example of mean reversion, starts plummeted in the wake of the crisis, averaging 687 thousand (half the long-term trend) over the past five years.  The silver lining is that 2012’s number of 781 thousand was a 28% jump over the prior year’s activity. The good news has continued into 2013 with March’s monthly data cresting over 1 million on an annualized basis. May’s figure of 914 thousand represents a 29% gain over the May 2012 figure.  True much of the gain has come from multi-family units, the domain of renters, rather than the single family space, which has a more positive knock-off effect across the economy. But this development could be considered beneficial as it rebalances the market away from marginal (i.e. risky) owners and allows the rental space to play catch up.
The overhang in housing inventory can be seen in the chart below. At the end of 2006 there were nearly 540 thousand new homes on the market. As fate would have it, this peak occurred just about the time the easy credit spigot got turned off. Over the ensuing six years, this glut had to get worked off before the industry could once again ramp up its core operations.
NHS inv
ales of new homes followed a similarly depressing trajectory. Monthly sales on an annualized basis peaked at nearly 1.4 million in July 2005. Sales plummeted to 270 thousand by early 2011, nearly one-quarter of its pre-crisis average. Time has healed this wound as well, given that monthly sales have risen 76% since the bottom to 476 thousand (annualized) this past May.  Even when ignoring the distorted figures of the bubble years, if demand for new homes continues to climb towards its pre-crisis average, the increased building activity should provide a tailwind for the broader economy.
Although a painful process, this culling of inventory was necessary to meet the toned-down demand from homebuyers. The same dynamics have played out with existing homes, which represents 85% of the housing market.  May’s inventory of existing homes for sale is 10% below figure from 12 months prior. Existing home sales ticked up nearly 13% over the same period. While this segment does not prime the overall economic pump as new home activity, it is evidence of a market finding a new equilibrium. The combination of rising sales and lower inventory has pushed the widely followed figure of market supply at the existing sales pace to 5.1 months, below the accepted equilibrium of six months. The market for new homes has proven even tighter with the inventory to sales figure at 4.1 months.

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