Step One of a Housing Bottom

Last week’s report on residential construction provided more evidence that housing may be beginning to bottom. The headline evidence, noted by most media and economic pundits, is the rebound in housing starts over the past two months:

The rebound is from an extremely low level, so it’s hard to get too excited about it. But it does suggest that the plummeting of the past few years may finally be over.

As I noted last month, however, a bottom in housing starts isn’t a bottom in housing. From a macroeconomic point of view, the key thing is the amount of construction activity, which depends on both housing starts and housing completions. Not surprisingly, house completions plummeted along with housing starts, albeit with a lag reflecting the time needed for construction:

Completions have bounced around the 540 thousand level in four of the past five months, suggesting that they too may be putting in a bottom.

It’s crucial to note, however, that the number of completions (538 thousand in June) has been higher than the number of starts (470 thousand in June). As a result,the number of homes under construction is still falling:

Fewer homes under construction means fewer construction jobs and fewer purchases at The Home Depot (NYSE:HD). So housing is still a drag on the economy.

The apparent bottoming of housing starts and completions should thus be viewed as only the first step in the larger process of housing making a bottom. The next step will be for home construction to stop falling.

June’s data suggest that day may be coming. The gap between housing starts (which increase the number of homes under construction) and completions (which reduce the number of homes under construction) was the lowest its been since early 2006:

From a macro perspective, housing will have bottomed once housing starts have caught up with housing completions. (Of course, there’s also a third issue — when will there be a bottom in housing prices? — that I will address another day.)

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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