Plunge in Housing Starts Signals Long Term Supply Glut

Posted by Michael A. Kamperman on May 19, 2009

This morning multiple analysts cheered the worst housing start numbers in 50 years as a sign shrinking supply will finally begin to align with demand.  Houses are 60 to 100 year assets on average.  Currently the U.S. has 19 million vacant housing units including both single family homes and apartments.   The simple idea is that if we build fewer homes we will be able to absorb the excess inventory on the market.  People like to build and buy new homes.  Therefore one natural conclusion is the weakness in prices for existing homes is causing those that were thinking of buying a new home to purchase an existing home at a bargain.  This could mean that many markets are now priced well below construction costs and building makes no financial sense.  It is also possible that the plunge in housing starts indicates financing is getting tighter, especially for commercial apartment projects.

However, there could be something more going on with the data than meets the eye.  It could be that despite a plunge in housing starts supply is continuing to grow.  If this is the case, then home prices are not close to bottoming out.  Evidence is mounting that the number of Americans occupying the same dwelling is growing.  During the Great Depression it was common for three, and sometimes four or five, generations to live in the same home.  It was common for those with homes to rent out rooms for income.  Finally multiple roommates were the norm.  We already know that many kids graduating from High School and College have no job and are either staying or moving back in with mom and dad.  With unemployment rising it is reasonable to assume that those without jobs and meaningful income are moving in with relatives and friends.  It is also reasonable to assume that many that are foreclosed upon have to move in with someone as well.  Also, the loss of construction jobs probably means many immigrants from Mexico are returning since there are fewer jobs available in America right now.

This pattern would represent a reversal of the transient go it alone society we have built in modern times.  A return to more communal living arrangements means that we will not absorb the glut in housing anytime soon.  In fact, we could see the glut grow despite a steady drop in new housing starts.  If this new trend picks up steam the credit markets will get even tighter and the overall economy could fall much further from here.