New Home Construction Up, But Building Permits Drop

by | May 18, 2010 | Headline News | 4 comments

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    In the not so bad news category, the government reports that the housing market is rebounding:

    U.S. housing starts increased for the second straight month in April to an 18-month high, the government estimated, but building permits fell sharply, casting doubts on the momentum of the housing recovery.

    Housing starts rose an estimated 5.8% in April to a seasonally adjusted annual rate of 672,000 from an upwardly revised 635,000 in March, the Commerce Department reported Tuesday.

    This is, apparently, good news, especially coming off of April’s sales numbers showing a 27% increase Month over Month. As we pointed out in April, however, the sales numbers may be due, in large part, to the $8000 tax credit offered by the government for first time home buyers. While the near term trend seems positive, especially with new home construction numbers, concerns exist for the latter part of 2010, which many analysts have suggested would plunge the US economy back into a technical recession.

    New home construction does not mean the homes have been sold, and building permits may be a forward indicator of this:

    However, building permits fell 11.5% to a seasonally adjusted annual rate of 606,000, the lowest in six months.

    Permits for single-family homes, considered by many analysts to be the number in the housing release, fell 10.7% to a 484,000 annual rate.

    We have the government tax credit now expired, roughly 7 million plus foreclosed and delinquent shadow inventory homes that have not yet been reflected on banks’ books, credit markets remain tight, mortgage rates will likely rise due to federal debt problems, millions of adjustable rate mortgages are resetting interest rates higher over the next two years, and home prices in many areas have resumed their downward slide.

    While today’s news may seem positive, one must consider the dynamics of the entire real estate market before rushing to judgment about a recovery in real estate.

    Our view since the Summer of 2009 has been that the bottom for real estate is not yet in, with average national home prices still well above the historical, inflation adjusted price of around $110,000 (going back 100 years).

    This is a credit contraction and the pendulum is now swinging in full force from the top of the bubble to the extreme opposite. If history is any guide, corrections are equally as violent as bubble formations, if not more, because the momentum in the other direction can be ferocious and very fast. This means that the pendulum will not simply revert to the mean, but will likely overshoot in the opposite direction.

    Since the housing bubble’s peak, which reached an average national home price of around $200,000, we’ve seen real estate prices deflate nearly 20% to about $165,000. So, just to revert  to the historical average of around $110,000 housing prices would need to slide another 30% from here. While these are rough estimates based on Glenn Beck’s History of Home Values, other sources cite similar numbers, including percentage declines. And while the “average” home price may be more for the last couple of decades (about $140,000 from 1975 through 1999) than it has been for the last 100 years, we’re still looking at a significant decline if the housing market should turn down from here. The pendulum is swinging, and will likely overshoot the average in the opposite direction, so prepare to see real estate take a serious hit going forward.

    It’s hard to imagine the average price of a home losing 40% – 60% of its value during the course of this real estate bust. For those who say its impossible, we point you to the Japanese real estate decline of the 1990’s, which saw Japan’s property values lose more than 70% from top to bottom, and the Japanese have yet to recover.

    Developers, both residential and commercial, can build all they want, but if nobody is buying or renting, then it really doesn’t mean much. In the coming years, we expect to see hundreds of residential developments sitting without residents and continued commercial vacancies.

    Real estate is not bouncing back any time soon – perhaps for a decade or more.


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      1. “… mortgage rates will likely rise due to federal debt problems, …”

        I doubt it. 

        Why deflation of the dollar/gold will not occur. 

        The Fed will not raise interest rates WITHOUT FIRST fixing all of the following: (1) fixing unemployment, (2) housing, (3) raising taxation revenues and (4) slashing entitlements.  Like the man that makes minimum payments on his Visa card using his Master Charge… The entire economy is built on debt, the Fed can not raise interest rates as interest only on the ever increasing debt would be paid by even more debt.

        Items #1 and #2 will not occur as the majority of American citizens are already bankrupt on paper.  Half of the mortgages are already upside down.  Home prices may fall another 40% as some 5 to 11 million additional properties are foreclosed in 2010-2014.

        Item #3 will not occur unless item #1 and #2 are first fixed.  We are not even talking about the Local and State fiscal crisis which may require a bailout that will never be repaid that exceeds social security.

        Item #4 will never happen when now the baby boomers are retiring, living longer and the Obama health care has passed.  The costs of entitlements are an unrecoverable debt spiral.

        If the Fed did raise interest rates, money would become impossible to borrow, business and industry would shut down.
        Unemployment would skyrocket, tax revenues would decrease substantially and the government would have many many millions more on public assistance, thus the national debt would skyrocket.

        If the Fed did raise interest rates, the interest on the debt would likely exceed the total amount that the Fed collects in taxation.  The National debt will most likely never ever decrease.

        Deflationists will be proved wrong and be totally broke holding worthless American IOU Dollars.

      2. Constructions’ last gasp before the coming double dip.  

        Most likely developers had already purchased the land prior to the downturn and did not want to get caught with property tax liabilities.   Better to use cheap (illegal) Mexican labor to develop the land and housing, shift the financing liabilities over to Fannie and Freddie, so Dodd, Frank, and Obama can screw the taxpayers over and over in the name of promoting the bogus economic growth.   The big LIE.

      3. Well when i kicked out of my house ,I took a 40 ,000 dollar second loan out about 6 months before and bought 2 quads and a trailer and a new chevy truck to pull it with .  Needless to say i just turned in the keys and walked away from the house  . I still have my truck, trailer and 2 quads and enjoy them every weekend.    Only in america !!!!!   Perfect riding weather today in California !

      4. Can anyone say impact fees?? Yes back in 04 and 05 when most counties were doubling impact fees, developers pulled their permits to avoid the doubling of impact fees. In many areas permits are only good for 5 years. Thus we have a use it or loose it scenario. My guess is it will wind up as a net loss x2.
        Housing and unemployment will be the key factors in any recovery. If we can’t turn housing around we are doomed. Housing and unemployment are on a downward spiral and as time passes its getting wider and deeper; sucking in more and more people like an upside down vortex. Very soon the banks will be face to face with millions of people like Goner who make a financial decision to walk away. The really bad news for banks is that the new breed of people who are walking away are small business owners. Attorney’s, Doctors, Service professionals like Accountants and Insurance Agents. On an average basis these type of prosessionals employ 3 to 5 people, thus compounding the unemployment.
        This Administration has shot America right in the heart, Small Business. The writing is on the wall, we all know where this is going. Well, everyone except the 535 people in Washington.


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