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Tuesday, March 18, 2008


the first hint of optimism for housing

it's not much to get excited about -- there's a long way to go -- but house price declines, busting homebuilders and tightening mortgage credit are starting to have their effect on the market in new homes.

The second graph shows Single family housing starts vs. New Home sales. Single family starts also include homes built directly by owners, in addition to homes built for sale (and some other minor differences).

This graph indicates the difference between single family starts and new home sales has narrowed recently, possibly indicating: 1) that fewer homes are being built by owners, and 2) that single family starts are now low enough to begin to reduce the inventory of new homes for sales.

inventory reduction -- if it starts become evident -- would be indication that prices are falling far enough to begin clearing the market. prices would then very probably continue to decline in an effort to attract more demand to clear backlogged inventory.

to be sure, sales are still falling and inventory is very, very high and still rising -- there's no bottom to call quite yet. as calculated risk noted a couple months ago, lowest lows in starts may come further down -- possibly much further.

but the narrowing of the spread between new home starts and new home sales has been a historical precondition of a bottom in both starts and sales, such as was the case in 1982 and 1991.

and the lowest lows in real house prices followed in those cases at a distance of some 8-12 quarters.

UPDATE: more along these lines from calculated risk. and more. as an aside -- if we are closing in on a bottom in new home starts and sales, what might it mean for the builders?

a thorough look back at historical performance is difficult, but some conclusions might be drawn from the 1991 sales low point.

many homebuilder stocks peaked in 1986 or early 1987 -- coincident with the peak in new starts. and while real home prices bottomed finally in 1994 alongside existing home inventory, the builders had been nourished on increasing sales volumes well before that. as can be seen in their charts, the low points came in late 1990/early 1991 with most stocks having fallen 50-80% from peak.

that sounds very much like the current condition set, where homebuiders have been falling since the 2005 sales peak and are now as a group off by two-thirds with many individual cases being down 80% or more.

to be sure, some will go to zero. but as a group, i've heard sillier ideas than going long what has to be one of the most heavily shorted sectors of the marketplace.

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