A Surge In Construction Coming?

Free Exchange May 15, 2012

May 15th 2012, 15:04 by R.A. | WASHINGTON

IT'S been a long time coming, but America's housing market finally seems to be normalising. Construction has been so low since the beginning of the bust that many markets are experiencing increasingly tight conditions. That's supporting rent increases, and that, in turn, is putting a floor under home values and leading to an uptick in construction. The question is: how large an uptick?

Builder confidence has risen sharply in recent months and, as Calculated Risk points out, that typically presages a surge in construction:

A construction-oriented phase of recovery would be most welcome now given the shaky state of export markets. But any rebound in residential investment will be bounded by the Fed's tolerance for inflation. Indeed, as Joshua Aizenman and Menzie Chinn argue, housing might have ended its long swoon earlier had the Fed been willing to generate"”or at least tolerate"”a bit more inflation.

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In "The Alchemy of Finance", Soros does a great job of explaining how the provision of loans using homes as collateral expands credit, which over time increases home values, which leads to a greater expansion of credit, etc.

That is, until it doesn't, and then you get a bust.

Anyway, this post is good news for the present business cycle.

Don't over-read this data. Construction is seasonal, and we are heading into the summer, so most builders will be optimistic that their work will improve from the winter. However, the housing starts graph appears pretty stagnant, so I am not sure if the wishful thinking of the builders is translating into actual increases in construction.

Housing investment is unlikely to add much (if at all) to inflation; there is enormous surplus capacity in the construction sector, which could absorb a substantial increase in demand without much by way of price pressures.

Of course housing will recover (in many states). The glut was big, but 5 years of rapid population growth without any new construction has cleared spare housing capacity in many local markets (and perhaps, soon, across most of the nation).

It is hard to tell from the chart, but is it possible that, since Jan - 10 the HMI has been following single family starts? Before, confidence built houses, and now houses build confidence. At the very least, it looks like the time interval between HMI and starts has disappeared.

Perhaps the only upside to the current trouble in Europe and slowing economy in China is that oil prices have stopped increasing, and even retreated slightly. Hopefully this gives enough breathing room on inflation, that the housing market and employment are able to recover before the Fed feels the need to tighten.

We're looking at winding up my parents' estate. Regarding the house, our local (San Francisco area; East Bay) real estate agent says we've got a hard choice: rental property is in short supply, so we could do well renting it.

But apparently houses are in short supply as well, so we could do well selling it. Apparently he had one open house last week where out of 50 views, 5 made above asking price bids within a day.

But it also indicates that, after a few of years of crashing prices, the local housing market is in recovery.

Before the bubble it was that all prices are local.

Guess the crash hasn't changed the "one-size fits all" mentality of the bubble.

Glad to hear things are good in your area.

NPWFTL Regards

Does the spurt in prices and demand have anything to do with Facebook insiders cashing in for the IPO?

NPWFTL Regards

I think they are mostly an hour down the road. And it they have been living farther out and making a 2 hour commute, they would now have the money to buy right in Silicon Valley.

But it is possible that news of the IPO is convincing others in the area that business is safely back. So they can spend the money they have been caching in their mattresses.

Maybe I should move my house to Oakland? It sits on almost an acre.

The rather large rise in the red line there at the end corresponds to a substantial improvement in the National Association of Home Builders' index of builder confidence. It has doubled since September and, if history is any indication, it presages a surge in construction. http://www.economist.com/blogs/freeexchange/2012/02/housing-markets

Been there before. 3 months ago.

Where's the surge?

NPWFTL Regards

BTW...

If I wanted to buy a new house...

I documented housing prices in my neighborhood in Buttonwood http://www.economist.com/comment/1376072#comment-1376072

A house up the street in 1990 = 100. It sold in February at 56% (56) of the 1990 value.

A house across the street down 4 sold last month for 71. Using the 1990 value of the above house.

If I were to compare it to mine, it sold at 83% of what I paid for mine, years ago.

The prices are nominal, not cowbell adjusted.

NPWFTL Regards

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A Surge In Construction Coming?

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