When will housing start to contribute to the economic recovery?

The answer, of course, is anyone’s guess.  But next week we start another round of updates to monthly US housing data beginning Tuesday when the Census Bureau releases August 2011 housing starts statistics. The market will be looking for any indication that housing is finally rebounding, simply stabilizing at recent lows, or falling deeper into a slump.

As we have noted before, in most economic recoveries residential construction leads the general economic recovery.  Home purchases are very sensitive to interest rates, which tend to be their lowest at the end of a recession as monetary policy is often set to stimulate demand through lower rates. As a result, interest sensitive purchases are the first to rebound at the start of a recovery, with big ticket items such as homes and automobiles leading the way.

As seen in the chart below, housing starts, both total and single-family, remain around their 30-year lows.  In March 2009, single family housing starts reached their lowest level in more than 30 years, registering just 353,000 units on a seasonally-adjusted basis.  As of the July 2011 report, they were only at 425,000.  To put this into perspective, the average over the 30-year time period is about 1,075,000, or about 2.5 times the current rate.  This housing crisis has clearly been significant enough that even low interest rates (average 30-year conventional mortgage about 4.2%) cannot create new construction, whether due to fear among buyers or tightening credit standards among lenders.  We have a long recovery ahead of us, when it begins remains the big question.

US Housing Starts. Source: US Census Bureau.

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