Are Housing Starts Up... or Down?

John Mauldin writes the following in his newsletter:

When Housing Up 4.5% Is Really Down 4.1%

Sometimes you really just have to look under the hood of some of the headlines. I must admit I was rather surprised to read yesterday that housing starts were up 4.5% in December. With both of new and existing home inventories rising, this just did not make sense. But there it was. The TV pundits and the financial press were full of analysts telling us we have seen the bottom in housing. So much for my thoughts of a housing led recession. Was it the weather? Overly optimistic builders? Or was I just wrong and the bottom in the housing slowdown had been reached quicker than it has in previous housing slowdowns.

It turns out that new home construction did not rise. In fact, if you look at the data, new home construction was down by 4.1%. What was up was multi-family apartment construction which by a very robust 19%. And that makes perfect sense. Look at the CPI data released yesterday. What has been consistently the biggest source of inflation for the past two years? Rent, or rather, homeowner equivalent rent. It was up over 4% over the last 12 months.

The demand for housing is falling and sub-prime mortgages are harder to get. But people have to live somewhere. The population is growing and the demand for a place to live will rise. And the demand will be in rental units. Rising prices? Increased demand? Money is cheap and willing to take lower returns? And there are a lot of construction firms that I bet are willing to put in lower bids as new home construction is down. There is a need to keep your employees working. That sounds like a recipe for a lot of people to decide to start building apartments. But there is one more factor. There is a glut of condominiums almost everywhere.

If you go to Google and type in "housing foreclosures" you find several stories in the past few days of high end condominium developers changing their project to lower priced apartment complexes. They have a great deal invested in land and planning and have to do something. Banks are not lending for condominiums without significant guarantees. Of course, a lot of new apartments means that prices will not rise as much because of more supply. And that means that those looking for housing will have more options, which won't help housing sales.

What triggered my interest in housing foreclosures? Headlines in the business section for the Fort Worth Star-Telegram say that February listings for housing foreclosures are up 15.7% to a new record high. Looking at the plethora of stories on Google, you find that is the case all over the nation. The stories have a similar ring to them. You can substitute place and data, but they all seem to have a quote like this from the Star-Telegram: "...the main factors are job loss, serious illness or divorce. But in recent years, people have run into trouble when the interest rates have risen on their adjustable rate mortgages. Higher energy prices have also been a factor."

There was a different culprit in Las Vegas and a few markets where "investors" came in and bought homes expecting to flip them before they had to actually take out that mortgage. There was 1 home in the foreclosure process for every 277 households in Clark County (Las Vegas). That is significant.

One other item:
Sam Zell sent a Christmas card to his friends with a song called Capital Keeps Falling on My Head to the tune of Raindrops Keeps Falling on My Head. You can listen at http://www.yieldsz.com. It is really worth the time. I mean, you really need to listen. It is quite thought-provoking as well as a lot of fun.

~~~~ by John Mauldin

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