Fewer Housing Starts? Don't Despair

Starts plummeted more than expected. Carpenters and real estate agents won't like that, but home sellers may celebrate

If you have a house on the market or you're thinking of selling, the latest bad news on housing was actually very good news from a selfish perspective.

How's that? Because when construction slows down, it means fewer new homes are hitting the market to compete with your own listing. Less competition means quicker sales and higher prices. Relatively, that is—it's still an extremely soft market.

Clearing Out Inventory

The negative construction news from the government came out on Feb. 16. The Census Bureau announced a sharper-than-expected 14% drop in January starts on construction of private homes vs. the December level. That brought the seasonally adjusted rate of starts to the lowest level since the summer of 1997.

The localized recession in homebuilding—starts were down 38% from a year earlier—is bad news if you're a carpenter, a lumber salesman, or a real estate agent. It's even bad news for the overall U.S. economy, which was buoyed by housing activity over the past few years.

But it's good news if you need to sell your home this spring and you're worried about the overhang of unsold homes. As of December, there were enough existing homes for sale to last 6.8 months at the then-current rate of sales. That was up 50% from the 4.5-month supply as recently as 2005.

Growing Builders' Optimism

Some economists think that with the sharp reduction in construction, inventories could be back to normal by this summer. But the inventory adjustment could take longer if builders get itchy to go back to business and start ramping up the rate of construction.

On Feb. 15 the National Association of Homebuilders announced an improvement in the sentiment of builders. The sentiment index rebounded to 40. While that's still in negative territory (50 is neutral) it was up a lot from last September's low of 30, which was the most pessimistic since 1991.

Another factor that could postpone housing's recovery would be a tightening of mortgage credit. Right now, credit is easy, and mortgage rates are low. But default rates on subprime loans have soared, causing lenders in the segment to tighten credit standards (see, 2/6/07, "Subprime Time Bomb").

If some subprime borrowers no longer qualify for loans, a portion of the demand for housing will be knocked out. That will put further downward pressure on prices, which are already feeling the squeeze. The National Association of Realtors announced on Feb. 15 that prices fell in the fourth quarter of 2006 in half of all metro areas.

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