Ignore Housing Starts. The Real Story Is Existing Home Sales — and It’s Good News

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Housing starts just hit their lowest level in three months. As observers of the real estate market, should we be worried?

Housing starts, a statistic tracked by the Commerce Department, have certainly been on a decline for years, off 70% from their peak in Spring 2006. The latest data point, at a 571,000 annual rate, certainly isn’t a herald of recovery.

However, at this point, using housing starts as a tea leaf is like trying to talk about the smart phone market by looking at BlackBerry sales. The newest Berry is a great product — a sensible marriage of touch-screen convenience with the traditional keyboard that BlackBerry users love. But if you look at the financials of BlackBerry’s parent company, you’ll see that U.S. revenues have fallen 50% year-over-year — while iPhones and Droids dominate the market.

My point is that, similarly, the fact that new houses made with green technology and cutting-edge gizmos aren’t succeeding in the real estate market doesn’t give us much of a read on the real estate market as a whole. Put another way: Though they are often treated as a leading indicator that predicts the future direction of the economy, housing starts are actually more of a coincident one.

So when you look at weak housing starts, they do indicate that the real estate market is limping along, but unless you’ve been living in a cave for the past few years, you probably already knew that.

It the case of real estate, what’s crowding out housing starts is a pool of inventory. There are months’ worth of properties on the market, and they’ve got to be soaked up before new construction can begin.

After that happens, we should see a steady rise in housing starts — which is what happened with the real estate recovery in the 90s.

So if housing starts don’t show us the future, where should we look? Real estate agents in a micromarket tend to use sales volume and absorption rates — looking at how many properties are being sold in a given area, and whether any inventory backup is being soaked up.

On that front, the news this month is good: Existing home sales, released by the National Association of Realtors, jumped 7.7 in August, to a seasonally adjusted annual rate of 5.03 million.

That breaks a really important benchmark I’ve been writing about, which is a rate of 5 million sales per year.

Existing home sales has been so very volatile from month to month, as a data series, that I’m not going to feel confident until we clock another good month.

But if the September numbers released in October are good, that could be a tea leaf worth reading.

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