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Crescenzi: Game Changer In Housing Numbers


Housing starts fell to a new record low in January, falling to an annualized pace of 466k from 560k in December.

Importantly, housing completions fell a record 24.2% to a record low 776k annualized rate, the first reading below 1.0 million since 1982. The is extremely important because until now builders were still completing homes at a pace too strong for current conditions, preventing inventory levels from falling more rapidly than they recently have. Now that fewer homes are hitting the market for sale, the growing U.S. population will have fewer homes to choose from. This will accelerate the recent decline in home inventories. Have no doubt: this is a game changer for inventories and prices.

Doubters on the inventory idea will surely point to the difficulties that prospective homeowners face in obtaining credit to purchase homes. In doing so they will ignore the most important top-down concept, which is to compare the net change in the housing stock to population growth and household formation.

The concept is simple: a basic element of human survival is shelter and the need for shelter increases along with the population. Housing starts have now fallen to levels well below what is needed to support population growth. Whether people can afford to purchase a home or obtain the credit necessary to do so is not as important as the fact that they need shelter and will rent space if necessary. The bottom-line is that empty homes will become occupied one way or another so long as builders under-build relative to population growth.

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Keep in mind the key metrics: the U.S. population increases by about 3 million per year. Household formation will average 1.2 million per year, although it tends to slow during recessions for obvious reasons. Eventually, however, people will do the inevitable and get their own space (note: the amount of births in 2007 was the most in 1957 in the U.S.). Housing starts are running at a record low pace of 466k, which yields very few new shelters, say 300k or so, as many of the homes started are re-starts, homes rebuilt following damage from teardowns, and storms and such. Comparing the figure to population growth and household formation makes one thing clear: inventories are headed down.

Inventories are already falling. For new homes, the decline in unsold homes was the most ever in December and at 359k the tally is 211k below the June 2006 peak and very close to normal. For older homes, which tend to lag, inventories have fallen from a peak of 4.575 million in July to 3.676 million in December (this figure is likely to either be revised up a bit or be followed by an increase). Importantly, this progress occurred while housing completions remained high. Now that they have fallen, the decline in inventories will accelerate and with it change the dynamic on prices and the whole ball game, basically.

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Tony Crescenzi

Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to"