Edited by Tor, 20 February 2007 - 10:39 AM.
Starts colloapse
Started by
Tor
, Feb 20 2007 10:36 AM
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#1
Posted 20 February 2007 - 10:36 AM
Starts Collapse; Completions Are Next. What Happens In
Between?
Here are some of our thoughts on that housing start number we saw last Friday
and the implications going forward.
Housing starts tumbled 14.3% in January to a 1.41 million annual rate, and we
had been saying for a while that before the cycle was over, we were going to have
to see the supply-adjustment take starts down to levels of around 1.2, 1.3 or 1.4
million units. The fact that this soon and with such a thud on Friday is in some
sense good news since it offers up some sort of capitulation (bottoms usually
coincide with a cathartic one-month bust – so January could have been the one).
Starts are now down 38% year-on-year, which is close to the trends in the past
that marked the lows on this front, and building permits at 1.57 million units, are
now comfortably enough above the level of starts that a solid case can be out
forward that at least the starts have bottomed out.
The question is: what happens next? We happen to believe that what was more
important in last Friday’s housing starts report was not that starts collapsed, but
that completions didn’t, and we think that is the story beneath the story -- we have
opened up a near record gap between starts and completions that will inevitably
close. So if you think of homebuilding as an assembly line of sorts, the residential
construction recession is far from over even if the adjustment process is over at
the early stages of the production process. There is still a long row to hoe.
Keep in mind that the starts are only the footings in the ground – they only
represent the first 10% of the homebuilding process. So while housing starts
have collapsed to 1.4 million units, in that same report we saw on Friday, housing
completions barely declined, and are running at just under a 1.9 million rate or
33% above the current level of starts. And so the most important takeaway is that
construction cycles, in the aggregate, don’t end until completions converge on the
level of starts, and that usually happens 9 to 12 months after the starts number
has hit its trough. With completions running at a near-record pace relative to
starts, the worst of the decline in overall residential construction, employment and
housing-related manufacturing output is arguably still ahead of us.
Observer
The future is 90% present and 10% vision.
The future is 90% present and 10% vision.