Today’s little bit of economic news which could be construed to indicate that the economy is “climbing out of the ditch” was a far better than expected jump in home construction for May. According to the Wall Street Journal:
Housing starts increased 17.2% to a seasonally adjusted 532,000 annual rate compared to the prior month, the Commerce Department said Tuesday. Building permits rose; apartment construction surged. The 17.2% increase was much bigger than expected. Economists surveyed by Dow Jones Newswires forecast a 7.0% increase to an annual rate of 490,000. Tuesday’s report on housing showed building permits in May increased 4.0% to a 518,000 annual rate. Economists had expected permits to rise by 2.4% to a rate of 510,000. April permits fell 2.5% to 498,000.
On the surface, while better than forecast results are to be welcomed in a struggling economy, a look behind the headline numbers indicates that it might be too early to declare and end to the problems facing the housing market. While the decline in new housing completions fell in May for the third consecutive month and is down 29% year-over-year, in many parts of the nation, there remains a massive inventory of unsold homes (both single and multifamily). Adding to this inventory glut–even modestly–is not necessarily helpful. Furthermore, foreclosures continue at a record pace and it appears that this trend will only continue in many states for some time. As more foreclosed homes come on the market, the inventory glut only worsens. Also, mortgage interest rates have ticked up recently, which will likely have a negative impact on sales going forward.
Many builders report that any recovery in housing demand seen over the past few months is predominantly coming from the low end of the market, where government programs and tax incentives for first times buyers coupled with very low interest rates have brought out buyers. However, in the upper end of the market, rising unemployment (which likely will continue for some time), a huge oversupply of units, tougher mortgage terms and higher rates for jumbo mortgages (above $470,000) make it highly likely that more pain is ahead. Also, in many parts of the country, the glut of unsold multifamily units either on the market or soon to be is so extensive that it will take years to work through.
We do not wish to be overly negative in our assessment of the present economic situation, but the housing crisis, which played such a central role in driving the U.S. and global economy into the abyss, is not going to magically clear up overnight. Too many Americans remain trapped in homes on which they owe more than they are worth. The myth that homes always appreciate in value and residential real estate represents a solid path to wealth creation has been shattered, likely for a generation. Like an athlete on steroids, over the last eight years, the U.S. housing market has been playing well beyond its natural means. With those steroids now purged from the system, the artificially-induced excesses of the past are going to be more glaringly apparent as the housing market seeks its equilibrium over the next decade.
Governmental efforts to ameliorate this problem can only go so far and, to date, have made little to no impact. Indeed, mortgage rates have inched up recently because of weakness in the dollar and U.S. Treasury bonds, which was sparked by concerns over excessive government spending. Rising tax rates at the federal, state and local levels will only further diminish the consumer’s willingness to purchase a home. Lastly, so long as unemployment numbers keep worsening–which many economists expect well into 2010–home values will remain under pressure and the beleaguered housing market will remain in a rut.