"Shocking," "incredibly weak," "looks bad": Those are just a few of the reactions to the 14.6 percent drop in housing starts reported for October this morning. How quickly the conventional wisdom can pull a 180! A bump upwards in the September numbers had led many analysts to agree with Alan Greenspan that "the worst is behind us" in the housing bust. Now, some of those same observers are reevaluating their stance. Housing starts are at their lowest in six years, and a whopping 28 percent lower than a year ago at this time. Those are brutal stats.
Where do we go from here? The evidence is inconclusive that the housing bust has significantly restrained consumer spending so far. A handful of economists polled by the Wall Street Journal were even encouraged by the housing start numbers, because, in their view, the excess inventory of already-built homes has to be worked through before a recovery can get going, and the sooner that happens the better.
I am tempted to go out on a limb, and entertain the possibility that we may be near the bottom of the overall bust, though the decline in housing starts may continue into next year. Here's why: Any journalist who covers a beat regularly for an extended period of time learns which sources to trust and which ones are handing out a line of bull. Readers who have followed How the World Works' periodic updates on the housing market will know that I long ago lost any faith in the transparent spin embedded in the pronouncements of David Lereah, chief economist of the National Association of Realtors. But David Seiders, chief economist of the National Association of Home Builders, is another story.
Last month, when the upward tick in housing starts inspired optimism, Seiders poured cold water on the numbers, when interviewed by CNN.
While these numbers "showed that some real strength remains in the national housing market, all of the increase in housing starts was registered in the South and Midwest, where relatively good weather conditions apparently encouraged builders to draw down their backlogs of unused permits. But we believe the trend for housing starts is still downward at this stage of the game, as evidenced by the ongoing slide in issuance of new building permits and the significant decline in the inventory of previously issued permits," noted David Seiders.
"If both permits and starts were up I'd be scared because I think there are still inventory issues that we need to work through," he said. "I hope the bounce in starts is a temporary phenomenon. I think it's inevitable that starts will be down in October."
So far, events proved Seiders spot on, as they have done so consistently since I've been following him. So what does he say today?
"As builders continue to work off excess inventory, we expect that new housing starts will bottom out by the middle of 2007, with most of the decline occurring this year... Meanwhile, economic conditions and results from our recent builder surveys show that the demand side of the market appears to be stabilizing as affordability measures move up. Mortgage rates and energy prices have been declining in recent weeks, applications for new home loans are up, consumer sentiment is rising and employment and income growth are on the rise."
If David Lereah uttered those exact same words, I wouldn't bet a nickle on them. But Seiders has built enough reputation capital that I'm willing to spend some of my own. "Affordability" is just a builder-friendly way to say "price drop." so that's going to continue for awhile. But if Seiders is right, sales will probably continue to chug along and maybe, just maybe, the worst is over.
Let's see how it plays out.