New Home Construction Implodes

I would argue this report (see below) while causing angst, is actually part of the long term healing process. As I've said in the past, we all know there is too much inventory. Until we stop building more and more inventory, the supply/demand equation will never correct. Economics 101. So these type of historic drops in new home construction are the beginning of the fix. But just the beginning (as I said in the recent past - we're now in the 2nd/3rd inning since we finally see home builders give up the ghost) . And why the housing stocks are in a lot of trouble. Many are only surviving due to banks keeping them alive by extending credit and by cash flow from continuing to build homes. That no one needs.

Home Construction Drops 25%

• The prolonged slump in housing pushed construction of new homes in 2007 down by the largest amount in 27 years with the expectation that the downturn has further to go.
• The Commerce Department reported Thursday that construction was started on 1.353 million new homes and apartments last year, down 24.8 percent from 2006. It was the second biggest annual decline on record, exceeded only by a 26 percent plunge in 1980, a period when the Federal Reserve was pushing interest rates to post-World War II records in an effort to combat an entrenched inflation problem.
• Many economists believe that the current slump in housing will rival the dive in the late 1970s and early 1980s when housing construction fell for four straight years before beginning to recover after the severe 1981-82 recession. (oh really? I did not hear that last summer by "many economists" - I heard "the prices of home has never fallen nationwide in history - nothing to worry about)
• The drop in construction in December was bigger than economists had been expecting and reflected weakness in all parts of the country. Housing construction fell by 30.8 percent in the Midwest and was down 25.8 percent in the Northeast and 19.6 percent in the West. The decline in the South was a smaller 3.3 percent.
• "Builders have finally thrown in the towel," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "This is a precondition for recovery as it will eventually reduce the inventory overhang. But there is a long way to go." (Bingo!)
• In an ominous sign for the future, applications for building permits fell by 8.1 percent to an annual rate of 1.068 million units. That marked the seventh consecutive monthly decline and reflected the fact that builders have been slashing production plans in an effort to deal with a glut of unsold homes.
• Many economists believe the housing sector will remain weak through this year before starting to stage a rebound in 2009. (maybe Dec 31, 2009! Those silly "many economists" are at it again - a year from now they will be saying "...before starting to stage a rebound in 2010)") :)

So it looks like the writing is finally on the wall and "the majority" are starting to figure out what us in the minority were saying for quite a while. Much like the Fed it appears "forecasting" skills in this country are quite poor and unless the data stares us in the face, we do not accept the new reality. I think this Spring during the height of housing sales, we will see a lot more reality.

But remember folks, last summer we were told nothing to worry about - after all housing is only "4.5% of GDP". And all the problems were contained to subprime. Blah, blah... and blah.