In a not surprising development, although the media is always stunned by anything that has a negative sign in front of it, housing starts declined by 10.6% in the last month after an uptick in March. Of course, the expectations from economist was for a rise of 2.7%. As I said, to us, this is not a surprising development considering that household formation still remains at depressed levels as more and more individuals under the age of 35 are doubling up or living with parents. In most universes, unless you are a Nobel prize winning economist, simple math and physics do apply.
With an excess supply of existing homes on the market, not to mention the flood of shadow inventory sitting on the banks balance sheets waiting to get foreclosed on, not only do we continue to expect that home prices will decline by another 15% but home starts will remain at depressed levels for some time to come. The shear gravity of vacancies, lack of mobility, tighter credit and reduced income will pull at any significant rebound in the real estate market for some time to come.
The real issue, however, is buried in the details. Residential construction was down by 23%.
There Has Never Been An Economic Recovery With Home Building
Why is residential construction important. Every dollar that is put into building a new home has a multiplier effect, historically of $4 or $5. When someone starts the process of building a home it employs architects, contractors, suppliers, manufactures, framers, roofers, masons, plumbers, so forth and so on. That is just for one house. Construction has historically been a huge component of economic recoveries but it is an ingredient that is sorely lacking in the current environment. No amount of QE or POMO’s will supplant the impact that is received from building a new home. This weakness was reflected in yesterday’s release of the NAHB/Wells Fargo Housing Market Index which remains at some of its lowest recorded levels in the history of the index.
There was also weakness across the board with rest of the numbers as well. Groundbreaking last month was depressed by a 24.1 percent tumble in volatile multi-family homes, where starts for buildings with five or more units dropped 28.3 percent. Single-family home construction fell 5.1 percent.
New building permits dropped 4.0 percent to a 551,000-unit pace last month. April’s permits were revised down to a 574,000-unit pace and economists had expected overall building permits in April to remain unchanged at the previously reported 585,000-unit pace.
Permits were held down last month by an 8.8 percent drop in the multi-family segment. Permits to build single-family homes slipped 1.8 percent.
The End Of The Wrong American Dream
Along the path to individual insanity in the American society the idea of the “American Dream” was skewed from seizing an opportunity in America and using the capitalistic system to build a heritage for one’s family to owning a “McMansion” where the average individual was leveraged to the hilt and the house payment was as much as 50% of the individuals income versus the historical levels of 15%. American’s, and not without the express help of Alan Greenspan promoting Adjustable Rate Mortgages in 2004, attached their future, and their retirement, to owning a home that in most cases they couldn’t really afford. With an entire cable television channel dedicated to ever form of housing pornography one could imagine from house swapping, flipping, trading and pimping – it was never hard to believe that before long that house of cards would eventually fall.
That process has begun, but unfortunately for Jim Cramer who has now twice called for a bottom in the housing market, it will be some time before we will be talking about a sustainable and organic recovery in the housing market.