Tuesday, September 07, 2010

Housing Completions will set new record low in 2010

by Bill McBride on 9/07/2010 12:04:00 PM

One of the key questions for housing, jobs, and the economy is: When will the excess housing supply be absorbed?

The answers depends on:
1) The current number of excess housing units,

2) how many net units are added to the housing stock, and

3) how many net households are being formed.

There is no timely data for net household formation, and estimates of the excess housing supply vary widely. So the answer involves some guesses (I'll get back to these questions).

The best data is for completions of housing units - although the number of demolitions is unclear. So the limited purpose of this post to to provide an estimate of the net units added to the housing stock in 2010.

Housing units include single family homes (included as 1 to 4 units), apartments (5+ units), and mobile homes. Demolitions are subtracted from the stock.

NOTE: Table is based on Completions. Housing units added to stock:

200920101
1 to 4 units534.7480
5+ units259.8135
Mobile Homes52.255
Sub-Total846.7670.0
Demolitions2200200
Total646.7470.0

1 Estimates for 2010 based on completions through July.
2 estimated.

Notice for 2010 that the estimate is for 5+ unit completions to collapse. This is already in the works as shown in the following diagram:

Multifamily Starts and completions Click on graph for larger image in new window.

The blue line is for multifamily starts and the red line is for multifamily completions. Probably all the multifamily units that will be delivered in 2010 have already been started since, according to the Census Bureau, it takes on average over 1 year to complete these projects.

Since multifamily starts collapsed in 2009, completions will collapse in 2010. This finally showed up in the data for July as completions fell to 8.1 thousand from 17.1 thousand in June. Completions averaged over 14 thousand per month during the first 6 months of 2010, and will average close to 8 thousand per month during the 2nd half of 2010.

Note: this decline in completions will impact construction employment in the 2nd half.

Similar logic applies to single family units, although these only take around 7 months to complete. Almost all of the single family units that will be completed this year have already been started. There were 249.2 thousand completions during the first 6 months of the year, and completions will probably slow in the 2nd half.

The manufactured homes data is from the Census Bureau (and demolitions are estimated).

This means a record low number of housing units will be added to the housing stock in 2010. But unfortunately household formation is probably very low too - so the excess inventory might not be reduced substantially (I'll get back to this).

UPDATE: To be clear - the record low completions is bad news in the short term, especially for employment, but overall it is GOOD news for the economy and housing since it helps reduce the excess supply.

Special thanks to housing economist Tom Lawler who shared with me some of his thoughts on completions.