"If we're building 500,000 [houses a year], we are eating up that [excess housing] inventory. And the faster we eat up that inventory, the better off we are." -- Warren Buffett
Call it a silver lining: Homebuilding is going nowhere fast compared with household creation. And as Buffett points out, that's good news, since it means we're chewing through excess inventory. But it also shows the housing market is still a ways from recovery mode.
September housing starts came in at an annualized 590,000, below expectations. Over the past year, here's how monthly starts have fared:
|
Month |
Housing Starts Annualized, Seasonally Adjusted |
|---|---|
|
September 2008 |
822,000 |
|
October 2008 |
763,000 |
|
November 2008 |
655,000 |
|
December 2008 |
556,000 |
|
January 2009 |
488,000 |
|
February 2009 |
574,000 |
|
March 2009 |
521,000 |
|
April 2009 |
479,000 |
|
May 2009 |
551,000 |
|
June 2009 |
590,000 |
|
July 2009 |
593,000 |
|
August 2009 |
587,000 |
|
September 2009 |
590,000 |
Source: U.S. Census.
This is starting to show a fairly clear trend: Housing starts have probably bottomed, but are painfully slow to rebound. Shares of homebuilders like Beazer Homes
You can blame that slow rebound on a few things: First, foreclosures are still a disaster. Plenty of subprime borrowers have been purged from the market, but now a wave of option-ARM loans are resetting and recasting, pushing armies of "prime" borrowers into foreclosure. More foreclosures equals added supply. More supply depresses the need to build.
Second, the $8,000 first-time homebuyer credit is scheduled to end next month, meaning demand from first-time homeowners will fade, as happened when cash-for-clunkers ended. In anticipation, homebuilders are likely hunkering down. This should surprise no one: When you pay people to buy homes, they buy more. Stop paying them, and they buy less. No magic tricks here.
The big issue is how much more supply needs to be eaten away. This is an incredibly difficult question, because the "shadow inventory" is anyone's guess. Shadow inventory is composed mainly of two parts:
- Bank-owned foreclosed homes not yet on the market, presumably because banks hope prices will rebound and don't want to recognize losses.
- Homeowners who want to sell, but are holding off for the same reason as banks: They're waiting for prices to rebound.
No one knows how large this shadow inventory is, only that it's somewhere between huge and catastrophic. Any rebound in prices could explode new inventory, pushing prices back down.
What we do know, however, are the on-market inventory numbers:
|
Month |
Months of Supply, Unsold Homes |
|---|---|
|
August 2008 |
10.6 |
|
September 2008 |
10.1 |
|
October 2008 |
10.2 |
|
November 2008 |
11.0 |
|
December 2008 |
9.4 |
|
January 2009 |
9.7 |
|
February 2009 |
9.7 |
|
March 2009 |
9.6 |
|
April 2009 |
10.1 |
|
May 2009 |
9.8 |
|
June 2009 |
9.4 |
|
July 2009 |
9.3 |
|
August 2009 |
8.5 |
Source: U.S. Census and HUD.
With 8.5 months' supply, the housing market is as stable as it's been in a while. Problem is, 8.5 months is still high, with about six months' supply historically being a healthy norm. Plus, shadow inventory could make the real supply of unsold homes astronomically higher than it appears. In one candid estimate, Stan Humphries, chief economist at Zillow.com, predicted that more realistic numbers could "take about four years to run through." Wonderful. That's like being kicked in the groin while you're on the gurney.
All of which leads to the unsurprising conclusion: Housing is still in the dumps, and will remain face down in the mud for a while. Not only is this an uncomfortable truth for homeowners, but also housing-heavy banks like Wells Fargo
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