by Bill McBride on 10/09/2006 12:37:00 PM
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Monday, October 09, 2006
No one has a crystal ball, but last week Fed Vice Chairman Kohn and former Fed Chairman Greenspan made predictions on the housing market. From Dr. Kohn on Housing Starts:
"... any overbuilding in 2004 and 2005 was small enough to be worked off over coming quarters at close to the current level of housing starts."And from Dr. Greenspan:
... the "worst may well be over" for the U.S. housing industry that's suffering its worst downturn in more than a decade.In the previous post I estimated that overbuilding might have added close to 1.4 million housing units over the last few years. In this post I will estimate the impact on Housing Starts, Completions and New Home Sales. All caveats apply!
The level of completions needed is obviously dependent on the units needed, the amount of recent overbuilding, and the period over which the excess supply is absorbed. Using the Brookings forecasts, and removing mobile homes, we can estimate the U.S. will need about 1.7 million new housing units per year for the next 3 years, before subtracting the impact of recent overbuilding. Then using the 1.4 million estimate of excess supply from the previous post, and working the excess off over 3 years, this gives completions of approximately 1.2 million per year for the next 3 years.
Click on graph for larger image.
This graph shows U.S. completions and starts for the last 40 years (from Census Bureau).
Obviously completions follow starts. Although starts have recently fallen significantly, completions have only just started to decline. It appears builders are still completing too many housing units, and the result is rising inventories of unsold homes. Note that reported inventories have stabilized, but that the Census Bureau does not include cancellations in inventory (see this post), so inventory levels are probably significantly higher than reported.
Although I estimate completions might fall to 1.2 million units per year over the next few years, starts might fall even further at first - perhaps to 1.1 million unit rate (SAAR) or lower until builders start seeing conditions stabilize. This is the typical pattern - starts fall to a lower level than completions as builders react to changing market conditions.
What does this mean for New Home Sales?
This graph shows the reason new housing units were added.
The Green columns are completed new housing units intended for rentals. Blue are homes built directly for the owner and Red are homes built for sale.
The number of units built to rent will probably increase over the next few years, and the homes built for owners might decrease, but most of the decline in starts and completions will come from housing units built for sale.
Some simple addition ... If 600 thousand units are built as apartments or for owners each year, and completions fall to 1.2 million units - that gives 600 thousand housing units built for sale. Since builders will also be working off their inventories, New Home Sales might fall to 800 thousand per year or less - until the excess inventory is absorbed.
Perhaps some of these estimates are too high (or too low), but I think Drs. Kohn and Greenspan are overly optimistic. My view is the housing bust has just started.
Posted by Bill McBride on 10/09/2006 12:37:00 PM