When the starts have stopped, those of us in the real estate industry take a collective gasp of air and hold it for as long as we can. I’m talking about the number of housing starts that so many economists use to gauge the health of the real estate industry and general well being of the overall economy.
Not long ago, many areas across the country experienced significant growth in home prices and inventory. As demand for new homes increased and home sales began to soar, the amount of available product decreased, thereby causing the whole supply and demand explosion we learned so much about in our economy classes back in college. Walking around most cities, one could not help but to notice the looming grid-iron structures that would someday house hundreds of new condos, or the suburban growth that began to take over in areas always thought to be “out there” geographically, yet became the sites for gate-guarded or large master planned communities of new homes.
Recently, however, the Commerce Department reported that construction of new homes has dropped by almost 17%, and is now the slowest pace on records dating back nearly a half-century. If those numbers are not bleak enough, the applications to build new homes in the future also dropped to a record low, down almost 5% in the last month alone.
All this news may seem to be a blessing to some thinking perhaps the lower housing starts may help off-set some of the standing inventory, thereby creating more demand than supply someday soon. However, the decline in new home starts is seeded by the negative sentiment of the market by prospective purchasers. No new homes being built equates to less jobs and materials being produced to fuel the economy, which is why economists use new home starts to gauge over-all economic health. Less jobs and a weaker economy equates to less demand for new homes, leading to fewer home starts and a stand-off between buyers refusing to buy and developers refusing to build.
Taking the supply and demand equation out for a moment, there are also the tighter lending requirements and the steep increase in defaults and foreclosures that continue keep both buyers and developers out of the markets, adding fuel to the fact the U.S. is in the midst of the worst housing slump since post-World War II.
So what is being done to help off-set this economic gloom and doom? Anyone closely following the movement of the stimulus package or the housing acts that promise to stabilize the spiraling real estate market can tell you that plans to reduce the number of foreclosures by allowing current homeowners to potentially ‘reset’ their interest rates, or a cap increase which would allow for homeowners to participate in loans backed by Fannie Mae or Freddie Mac, may give potential purchasers the confidence they need to jump back into the real estate markets.
But don’t hold your breath on anything happening too fast. With an estimated 10 million people facing foreclosure in the coming years, and the depth of the economic recession expected to get worse before it gets better, I expect real estate professionals to turn blue before they start to see the green come rolling in again.