Step One of a Housing Bottom

Last week’s report on residential construction provided more evidence that housing may be beginning to bottom. The headline evidence, noted by most media and economic pundits, is the rebound in housing starts over the past two months:

Housing Starts (June)

The rebound is from an extremely low level, so it’s hard to get too excited about it. But it does suggest that the plummeting of the past few years may finally be over.

As I noted last month, however, a bottom in housing starts isn’t a bottom in housing. From a macroeconomic point of view, the key thing is the amount of construction activity, which depends on both housing starts and housing completions. Not surprisingly, house completions plummeted along with housing starts, albeit with a lag reflecting the time needed for construction:

Housing Completions

Completions have bounced around the 540 thousand level in four of the past five months, suggesting that they too may be putting in a bottom.

It’s crucial to note, however, that the number of completions (538 thousand in June) has been higher than the number of starts (470 thousand in June). As a result, the number of homes under construction is still falling:

Housing Construction (June)

Fewer homes under construction means fewer construction jobs and fewer purchases at Home Depot. So housing is still a drag on the economy.

The apparent bottoming of housing starts and completions should thus be viewed as only the first step in the larger process of housing making a bottom. The next step will be for home construction to stop falling

June’s data suggest that day may be coming. The gap between housing starts (which increase the number of homes under construction) and completions (which reduce the number of homes under construction) was the lowest its been since early 2006:

Housing Gap

From a macro perspective, housing will have bottomed once housing starts have caught up with housing completions. (Of course, there’s also a third issue — when will there be a bottom in housing prices? — that I will address another day.)

6 thoughts on “Step One of a Housing Bottom”

  1. Well it looks like in after a 1979 or/and 1980 low it went up only to be tackled back down again in the 1982 recession when the “fed” took back the punch bowl?

  2. I wonder how big the effect of the “first time home buyer” tax credit has been on the uptick in housing starts?

    When that credit expires this year I would expect these trends to fall or stutter a bit.

    Anyone know how many homes have qualified for the tax credit?

  3. @jami: Yes, the early 1980s scenario does give one a little pause. It is possible to put in a bottom and then have it fall away again.

    @Bill Greenlaw: Good question. I haven’t seen any estimates yet.

    @Steve: Seems possible, or at least is may stop subtracting.

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