Does anyone still hope that the housing market will lead a new recovery, or rather continue to handicap it? Bloomberg reports that the numbers for new housing starts in December sank to a new low, which won’t surprise those who keep track of inventory and housing values. That group apparently doesn’t include market prognosticators:
Builders began work on fewer homes than projected in December, a sign the industry that triggered the recession continued to struggle more than a year into the U.S. economic recovery.
Housing starts fell 4.3 percent to a 529,000 annual rate, the lowest level since October 2009, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for a 550,000 rate. A jump in building permits, a proxy for future construction, may reflect attempts to get approval before changes in building codes took effect at the beginning of this year.
Companies like KB Homes and Lennar Corp. project demand will be slow to rebound as elevated unemployment and mounting foreclosures discourage buyers. While low borrowing costs and falling prices are helping revive sales from last year’s post tax-credit slump, Federal Reserve policy makers are concerned housing may undermine the economic expansion.
“With sales still near record lows and a lot of unsold properties in the market, there’s very little reason for builders to add more homes to the supply,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, who had forecast starts would drop to a 527,000 rate. “Housing remains a key downside risk to the economy.”
Of course it does. High unemployment means fewer qualified buyers, and housing values continue to drop in reaction to the burst bubble in the housing markets. Those who are underwater on their mortgages can’t afford to move; those who have solid equity and could make a move to take advantage of pricing can’t find buyers.
Even the good news comes with a big, government-imposed caveat. Earlier today, the government announced a big jump in permit applications, which would normally signal an upcoming expansion in construction. In this case, though, the move is mainly predicated on expanded government regulation in building codes, which will act to depress permit applications from this point forward. Permit applications are relatively inexpensive and do not mean that builders will actually develop those properties, and in this case it may mean a dearth of such applications for the foreseeable future — at least until prices rise enough to make adherence to new building codes worth the investment.
In order to get the economy moving and expand hiring, governments really have just three realistic options: tax policy, monetary policy, and regulatory policy. Once again, this demonstrates that we’re going in the wrong direction on the latter and not doing anything on the first two, and we’ll see the results over the next few months.