Today’s Census data show another decline in the number of single-family houses under construction:
Housing starts and permits usually dominate the headlines on residential construction data day. In September, for example, single-family starts increased a healthy 4.4% (total starts increased 0.3%), and single-family permits rose 0.5% (but total permits declined 5.6%).
Those are certainly important measures, but I also like to look at a third measure of residential activity in the report: the number of single-family houses under construction.
That measure suggests that the housing market has continued to deteriorate in recent months:
The number of single-family homes under construction at the end of September fell to just 269,000, down about 14% from a year ago. I had once hoped that the housing market was putting in a bottom, with homes under construction plateauing at about 300,000. But we’ve now witnessed five straight months of declines.
Over at the Bank for International Settlements, Elod Takats has a new working paper that examines how demographics may affect asset prices (ht Torsten Slok). As he notes, standard economic theories suggest that aging will lead to lower asset prices. In an overlapping generations model, for example:
[T]he young save for old age by buying assets, while the old sell assets to finance retirement. This asset transfer can happen directly or through institutions such as pension funds. In this setting, the changes in the relative size of asset buyers (the young) and sellers (the old) have consequences for asset prices. In particular, the asset purchases of a large working age generation, such as the baby boomers in the United States, drives asset prices up. Conversely, if the economy is ageing, ie the subsequent young generation is relatively smaller, then asset prices decline.
Takats tests this theory on international data on house prices and finds a significant link with population age. He uses that relationship to estimate how much demographics affected house prices in recent decades and to project, based on demographic estimates from the UN, how population aging will affect house prices in the future:
He concludes that demographic trends boosted U.S. house prices by almost 40% over the past four decades. Given current population trends, however, his model predicts that aging will trim about 30% off of house prices over the next forty years.
I should emphasize that this does not mean that house prices will actually fall over that period. Other factors, e.g., growing incomes, should continue to boost prices. But house prices will now face a demographic headwind–blowing at about 80 basis points per year–rather than a demographic tailwind.
These headwinds will be even stronger in Europe:
Yesterday’s housing data were suitably glum, with single-family starts and permits both down (0.7% and 3.4%, respectively).
And what about my favorite metric, the number of houses under construction? It fell a hefty 5.3%. Which puts the number of single-family homes under construction at its lowest level in decades:
After the expiration of the new home buyer tax credit, only 286,000 single-family homes were under construction at the end of June. That’s down modestly from the 298,000 to 318,000 levels of the past year, when it looked construction was trying to put in a bottom. Just one more sign of continued weakness in housing markets.
The Economist asked several experts to recommend options for resolving Fannie Mae and Freddie Mac, the two failed mortgage giants.
In addition to comments, the magazine’s web site allows users to recommend responses they like. It’s hardly scientific, but since the rankings (as of 9:15pm eastern time) work to my favor, let me rank them in declining order of recommendations:
My co-author Phill Swagel (a whopping 13 recommendations) describes our joint proposal for fully private GSEs that purchase an explicit backstop from the government for their mortgage-backed securities. Pros: The relationship is explicit and transparent, taxpayers are compensated for bearing risk, the portfolios are eliminated, the government backstop will soften severe mortgage meltdowns, and competition can discipline the Fannie and Freddie duopoly. Cons: There are still risks from the remaining government role.
Larry Kotlikoff (11 recs) outlines another proposal to restructure the companies into more sensible private entities. His model: mortgage mutual fund companies.
John Makin (7 recs) wins the award for brevity, arguing that they should be liquidated over 5 years.
Mark Thoma (4 recs) suggests a continued role for the firms, as long as they face much tighter regulation.
Tom Gallagher (4 recs) proposes putting them back on the federal budget as real agencies. This avoids some potential pitfalls of having them run as private companies.
P.S. As an anonymous commenter helpfully points out, the entries over at the Economist have these newfangled things called “dates” associated with them. Not sure how I missed that. The two highest scorers are also the oldest. Also, I must confess that I clicked the recommend button on Phill’s piece, lifting it to 14 votes. Because of some weird interaction between Safari and the Economist site, however, that resulted in it believing that I recommended all five pieces. Ah the perils of technology.
The Bank for International Settlements has a great chart of house prices in its latest annual report (p. 39):
The rise and fall of U.S. house prices (red) is painfully familiar. The U.K. (brown) outdid the U.S. on the upswing, but hasn’t corrected quite as much. (Some other European nations also saw strong booms, but they are averaged into the figures for the Euro area (green)).
House prices in Canada (black) and Australia (olive green) have been showing notable strength. But is it sustainable? Or are some places (e.g., Vancouver) in bubbles?
And then there’s Japan (blue) and its persistent declines. If you worry that the U.S. is turning Japanese (an increasingly popular view with 10-year Treasury rates below 3%), you may want to ponder what a continuing, relentless decline in house prices would do the American financial system.
Today’s housing data are driving some optimistic headlines about the 1.6% increase in housing starts in March and the upward revisions to February data. Looking a bit deeper, however, one finds that single-family starts actually fell in March; all of the gain came in multi-family units.
As I’ve noted in previous posts (here, for example), I think it’s useful to look not only at the number of housing starts, but also at the number of houses under construction (which reflects the pace of both starts and completions). Why? Because that gives us a sense of how much construction activity is actually taking place:
As you would expect, the chart shows that the number of single-family homes under construction fell off a cliff in early 2006. Almost 1 million new single family homes were under construction in February 2006. Today there are just 305,000.
The precipitous decline ended last summer, and housing construction has now been flat for several months.