Crescenzi: Really "Good" Bad News On Housing

Hundreds of thousands of unsold homes will disappear in 2009 because household formation is outstripping increases in the housing stock: bank on it unless you believe the 3 million new people in the U.S. next year will live in caves.

Housing starts fell 18.9% in November to an annual rate of 625k, a record low dating back to 1959. The percentage decline was the most since March 1984 when starts fell 26.4%. Permits, which gauge future starts, fell 15.6% to a 616k annualized pace, also a record low. This is bad news for the economy, of course, but it is best viewed as good news because what is sorely needed in the housing market is a decrease in supply, which now looks extremely likely in 2009. The surest path to a decrease in supply is for home builders to under-build relative to household formation. Current levels of housing starts are giving rise to this cure.

The current level of starts yields about 400k or fewer new dwellings, as a chunk of new starts represent teardowns, the reconstruction of damaged homes, and such. Census Bureau data indicate that household formation will average 1.2 million per year in the time ahead, which means that starts are now low enough to begin absorbing the excess housing stock--people need shelter. Unfortunately, the problem is so sizable that the natural fix will take time--several years; the excess supply is close to 2.0 million or so. This does not mean that home price declines won't ebb before then: when the amount of unsold homes begins to fall convincingly, the price dynamic will probably shift.

    • Housing Starts, Permits Plummet to Record Low

A negative aspect of the report was the figure on housing completions, which increased 3.3% in November. The current level is a bit high relative to starts, at 1.084 million, which means that the housing stock isn't falling as much as the housing starts figure implies. Nevertheless, inevitably housing completions will converge with recent housing starts data, helping to reduce the excess supply of unsold homes. Alan Greenspan told the Financial Times on August 5th that "only later this year will the current suppressed level of housing starts be reflected in completion levels consistent with a rapid rate of liquidation of the inventory glut..." Greenspan has been proven correct on this one and when completions begin to fall it will be very good news in terms of the removal of excess housing supply.

Combine these data with any effort by the Fed or a President Obama and you have all the makings of a stabilization of the housing market--at long last--in housing. About 500k unsold homes will leave the market through the natural process of population growth and demographics (especially since the key age groups 25-34 and 55+ are growing at a good clip), and perhaps by hundreds of thousands more in response to decreases in mortgage rates and efforts by Obama to spur housing demand.

Yes, home ownership rates are falling, but some of these homes will be put out to rent--people need shelter. This is a bankable theme for 2009. This is one of the 10 bankable top-down themes I will soon publish to coincide with the theme of my new book, "Investing from the Top Down."

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Tony Crescenzi
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"