The smaller-than-expected number of housing starts in May helped send the stock market lower this morning. This chart from Calculated Risk (which you can click on to make larger) puts things in perspective:
Yes, the expiration of the federal house-buying tax credit seems to have led the industry to pull back on home building. But overall we’re still in a pretty sideways-moving pattern. And you’ll notice in the chart that starts for multiple-family houses actually rose month-over-month. If the reason we want starts to go up is to keep home builders busy and their workers receiving paychecks, then that sort of building does the trick just as well as the construction of single-family homes.
Now, building permits are trending down, too, which implies home construction will continue to lag in coming months. Permits, though, are still above where they were a year ago. (You can read the full new residential construction report from the Census Bureau here.)
What does this mean in terms of the bigger housing picture? Well, less home building is certainly a drag on the economy—and at a time when we could really use some movement in the other direction. But with respect to houses specifically, there’s still an argument to be made that we’ve got enough to go around.
Last week, Morgan Housel over at the Motley Fool made that pitch with the following chart:
Supply has come way down from its high, but this is largely because sales volumes have been juiced by a rush to beat the April expiration of the first-time buyers’ credit. The number will almost certainly spike next month. You shouldn’t be excited until supply falls below average for several months, showing vigorous demand on the part of buyers, and giving builders legitimate reason to build again.
More importantly, this chart doesn’t factor in so-called “shadow inventory,” which are primarily pseudo-bank-owned homes in the process of foreclosure that haven’t been brought to market. Bank of America (NYSE: BAC), for example, just disclosed that the foreclosure process has been taking an average of 13 to 14 months to complete. That creates a big backlog of homes that should be for sale, but aren’t.
So maybe we’re actually not in such a bad place with regard to the economics of the housing market. Perhaps fewer houses are still the right answer in terms of supply and demand. Of course, for the construction industry that does little good.