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[Tor]

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.

Edited by Tor, 20 February 2007 - 10:39 AM.