November 20th, 2008
Decline in Housing Starts; Good News or Bad news?
The latest report on new residential construction was released by the Commerce Department yesterday and it that housing starts and permits dropped 4.5% bringing new construction to it’s lowest level since 1959. Building permits, an indicator of future construction, also fell sharply, by 12%, to a record low of 708,000 annualized units. Permits for single-family homes, considered by many analysts as the most important figure in the report, fell 14.5% to 460,000, the slowest in 26 years. Over all building permits are down 40% in the past year.
So is this good new or bad news? The quick answer would be yes and no. It really depends on what your position is in the market. This is undoubtedly terrible news for the homebuilders. I’m actually a little surprised that none of the big publicly traded homebuilders like D.R. Horton, Inc. (DHI: 4.17 -0.35-7.74%), Standard Pacific Corp. (SPF: 1.26 -0.19-13.10%) or Beazer Homes USA Inc. (BZH: 1.28 -0.05-3.76%) have filed for chapter 11 yet. That said, this is also really bad knews for anyone who have significant investments in any these corporations.
On the flip side however, this could spell great news if you’re a real estate investor. The simple fact of the matter is this, there is not enough demand for the number of houses that are currently on the market. This of course goes beyond the mere fact that the prices of properties are down and that it is therefore likely to acquire them at a good discount. Here’s another way you might want to look at it. According to the Mortgage Bankers Association, home mortgage applications dropped last week by a seasonally adjusted 6.2% compared to the previous week, and the application volume was down 41.3% compared to the same week in 2007. Now factor in the reported decline in new housing starts. These developments imply a decrease in the demand for houses. Many people who are first time homebuyers, who would have qualified to buy when high LTV loans were available, are not able to qualify until they can come up with a larger down payment. As things are, prospective first home buyers are holding off purchasing new property and will be opting to rent in the meantime, or at least until the market becomes more stable. Then there are those who had become homeowners over the past 2 years by obtaining high-cost, subprime mortgages that they may not have truly qualified for who will now become renters again. Simply put, this is a fantastic time for anyone with the financial wherewithal to invest in building a good quality rental portfolio as there is a growing market for such units.
The greatest success stories were created by people who recognized a problem and turned it into an opportunity.
-Max Steingart
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