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Housing Starts: Borrowing from the Future?


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January 18, 2007

Housing Starts: Borrowing from the Future?

Peter Coy

Don't be overly impressed by the government's report today that housing starts in December rose 4.5%, while permits were up 5.5% for their first increase in 11 months. The report is good news for housing, but not quite as good as it appears at first glance.

Action Economics tore apart the numbers in detail and wasn't overly impressed. Some key points:

--Housing starts were seasonally weak earlier in the year, so they had some catching up to do.

--The weather was warm and dry on the coasts, which encouraged builders to start construction on some housing ahead of schedule. So there was probably some borrowing from future months.

--The number of permits has been lower than the number of starts for three of the past four months, including December. Since permits have to come before starts, that discrepancy is a negative indicator for the level of construction starts in coming months.

Action Economics' bottom line:

"Though most real estate indicators show stability since the June-August downsizing, the production sequence of starts, construction, and completions should continue to show downward ripple-through effects until mid-2007, as the sector digests the inventory overhang."

05:01 PM

Home builders

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Irrespective of the current real estate market conditions, real estate will always remain the best investment anyone can ever make. As a matter of fact, the investment-savvy buyer can make it really big in this type of market. This is the best market to be an investor. It's unlike those days when sellers here in the San Francisco Bay Area were discriminating because of multiple bids. Nowadays, it's very common to have sellers pay for closing costs and even give the buyer money back at closing for repairs, etc. Of course, one still has to be cautious and not overbuy (i.e. buy too many properties), unless of course they are buying at ridiculously low prices. With high numbers of foreclosures, the investor has many choices and multiple ways of building a solid foundation for perennial wealth in the future.

Paul LeJoy

San Francisco Bay Area

Posted by: Paul LeJoy at January 19, 2007 10:42 PM

Paul's remarks are laughable. We've seen a 400% increase in foreclosures in CA and this is only the beginning of the tsunami. The hokey financing schemes that allowed prices to become disconnected from incomes are going to be regulated out of existence when the consequences of selling a mortgage to anybody who could fog a mirror become apparent and prices will be in freefall when the additional foreclosures hit, most likely an increase of 1000% to 1500% from today's levels. House prices will correct to a level where the median home in an area is 4-5 times median income for that area in CA and 2-3 times in flyover country. It always has, always will. Once this ratio is obtained, this will be the time to pick up foreclosures, not before.

Posted by: Dave at January 24, 2007 02:09 AM

The actual press release at http://www.census.gov/indicator/www/newresconst.pdf states that housing starts rose "4.5 percent ?8.8%," i.e., one cannot statistically say they rose, a minor detail not mentioned AT ALL in the Nat Assoc of Home Builder's version at http://www.nahb.org/news_details.aspx?sectionID=148&newsID=3941 and even the fairly detailed articles at financial sites like http://www.bloomberg.com/apps/news?pid=20601087&sid=a4DsCnFbwYWg&refer=home where the data is discussed and interpreted somewhat. If even the finance sites selectively report government statistics, one must turn to the blogosphere where links are provided to the actual report.

The rest of the numbers in the report are even more negative, indicating clear declines of "18.0 percent (?7.1%) below the December 2005" (i.e., a real decline) levels, but the headlines were universally that housing starts "rose" or "jumped" and the financial markets reacted as if this were true. Housing is in a historic meltdown. There is an unprecedented oversupply and there will be an unprecedented price correction, worse than that of the early 1930s. Such statistically negligent reporting continues to amaze me!

Posted by: Dave at January 24, 2007 02:34 AM

Dave,

Point well taken. I posted a blog entry today addressing your criticism. Here's a link to it:

http://prod-blogs.businessweek.com/the_thread/hotproperty/archives/2007/01/why_we_ignore_t.html#more

Posted by: Peter Coy at January 25, 2007 02:30 PM


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