A jump in housing starts is NOT good news for the economy…

Here is a quick rant so prepare yourself…

And here is exactly why stock markets are so backwards.

The news…

“The Commerce Department said housing starts jumped 22.2 percent to an annual rate of 583,000 units last month from 477,000 units in January. It was the biggest percentage rise since January 1990 and the first gain since April.”

“But compared to a year ago, housing starts had slumped 47.3 percent in February and permits were off 44.2 percent.” SOURCE.

Yes, this is a leading indicator “hinting” that housing has bottomed out. Yes, this is good news for some. Home Depot stock went up because of it. But this really isn’t good news for homeowners…

Why?

Housing Inventory is still high. Yes, home builders need to build if they want to stay in business. Yes, they need to build homes in advance of need. Yes, housing inventory has come down from 11 months of supply to about 9 months of supply. But it’s still too high! For the housing market, 6 months of inventory is the generally accepted amount where supply equals demand. We need demand to outstrip supply if we ever are to hope for a price increase in our home values.

Home builders are getting desperate and are jumping the gun. They are hoping that demand for houses will take off in the spring and summer months. (The much talked about second half recovery). I am pretty confident that the demand won’t be there and they are just making things worse by ramping up production again.

Here’s the real news on the street…

I have a friend who has placed 4 bids on foreclosure properties. They have all been turned down for cash bids put in by investors. She would have had to finance the house.

What’s the lesson?

Foreclosures take a lot more work than your average home owner is willing to put up with. Many of those homes are trashed and need repairs or major cleaning, etc. She is one of the few who is willing to do the work and has extra cash to pay for repairs. Most homeowners don’t fit into that category.

The only people really buying now are new homeowners who will take the $8,000 credit. Existing homeowners probably won’t be trading their house for another one because they are underwater or because they refuse to sell for less than they paid for it.

There is still a lot of “false” demand (created by the stimulus and cash ready investors) on the market and a large amount of “phantom” inventory (homes in some stage of default that are not listed on the MLS)  not on the books.

Those two things are two totally different stories and would make my short rant WAY too long and not so quick at all so I’ll leave you with this…

PLEASE do yourself a favor and educate yourself. Don’t take what you read in the news at face value. And remember that what is good for the stock market isn’t always good news for YOU!

Here’s to being educated about the economy,

Jeremy

p.s. Have you been watching these shows with Jon Stewart and Jim Cramer on The Daily Show? If not, you should!

Originally posted 2009-03-17 16:59:00. Republished by Blog Post Promoter

Comments

  1. I am not as much an economic theory person as I am an investment theory person; and hence my question: Do housing starts include both spec homes and those with qualified buyers?

    If home builders are building purely on speculation (homes with no buyers yet), this rise in housing starts might spell more concern, as you suggest, because of addition to supply. If a great number of these housing starts, however, represent homes with qualified buyers, especially first-time home buyers, I would personally feel more confident in the increase.

    The positive view is that it takes labor and building supplies to build homes and the housing sector is a significant portion of the economy.

    At the same time, as you mentioned, the year-over-year numbers are still quite poor. Either way, one can manipulate numbers or make headlines look any which way they choose, which is why I do not immediately buy into any information coming from a source that is paid by selling advertising (e.g. mainstream media)…

    “Men are disturbed not by things, but by the view which they take of them.” ~ Epictetus

    Kent @ The Financial Philosopher’s last blog post..Finding Beauty in Ugliness

  2. Great article Jeremy,
    You’re right, it’s the massive inventory of homes that is preventing home values from going up. The lending industry has upped its standards for loans so much that sixty percent of mortgage applications get turned down. At that rate, we’ll have a huge inventory of real estate for at least five years.