Market DirectionsHousing Boom and Bust
American housing starts eked out a minor gain in July reaching an annual rate of 546,000. But even that small movement was evident only because the prior month was revised down to 537,000 from 549,000. Starts have declined 20% since the expiration of the housing tax credit in April.
There is simply no historical precedent for this level of activity in the new home sector. In the 24 months since July 2008 housing starts have averaged 604,000 per month (annualized), with a high of 844,000 in August 2008 and a low of 477,000 in April 2009. The twenty year monthly average going back to 1990 is 1.430 million. The average for the twenty years from 1970 to 1990 is 1.608 million. From the beginning of this statistical series in January 1959 until January 1970 the average was 1.420 million with a low of 843,000 in October 1966. In the 1981-82 recession housing starts dropped briefly to 837,000 (November 1981), and averaged 916,000 for the year from July 1981 to June 1982. Similar numbers though for a shorter period occurred in late 1974 and early 1975. Housing starts fell to just below 1.0 million in December 1974 and in February and March of 1975. The home construction industry and its attendant employment and allied economic activity have now lingered for two years at an average of 604,000 annual units, 34% below its weakest prior historical average from the 81-82 recession. 
US Housing Starts 09/30/59--07/31/10 Bloomberg
Housing construction is highly cyclical, construction booms have been regularly followed by precipitous busts. A glance at the accompanying chart gives a picture to the normality of this cycle. In the three previous booms, the rising tide of home construction lasted, from trough to peak, three years (December 1969 to January 1973), three years and three months (February 1975 to April 1978) and three years and one month (November 1981 to December 1985, second peak). After the massive but brief overbuilding the market quickly corrected, the homes were sold and the process began again. In the 1970-73 boom even more homes were built, 2.494 million (annualized), in January 1971 than in the January 2006 pinnacle of our boom. The chief difference between the earlier housings booms and the one that is still being corrected is longevity. The up cycle in construction that peaked in January 2006 had begun 15 years earlier. There had been no decline in housing starts of anywhere like the magnitude of prior crashes in that entire fifteen year period. How had the normal cyclical nature housing construction been tamed? The answer is Federal government policy and by now it is a familiar story. Beginning in the Clinton Administration and continuing though both Bush terms the Federal government consciously sought to promote home ownership. Banks and mortgage lenders were pressured to expand their credit to include many previously excluded borrowers. Fannie Mae and Freddie Mac aided by many commercial and investment banks securitized loans and recycled the proceeds back into the mortgage markets. The Federal Reserve cooperated with extremely low interest rates, originally for other reasons, and home builders kept putting up more and more houses. From September 1997 until December 2006, nine and a third years, 112 months, the annual rate of housing starts dropped below 1.5 million only twice. The average was 1.752 million units per month. It was almost a decade of boom level construction. The most extended period of 1.5 million or more annual units in previous booms had been from January 1983 until November 1987, 59 months with one month below 1.5 million. That monthly average was 1.737 million units. The current excess housing inventory is the product of a construction boom that lasted almost twice as long as the longest prior surge. All of those excess homes will have to be discounted and sold or repossessed and discounted and sold before the housing industry can resume its normal cycle. Two years at the lowest recorded level of home construction has not yet depleted this excess inventory, partially because high unemployment retards normal home purchases. In the meantime the industry will be unable to add its normal complement of activity to GDP. By interfering in the natural cycle of housing construction the government has only succeeded in creating a bigger boom followed by an enormous bust. |