Why the dip in housing starts and permits is actually a good thing

December 19, 2007

When I heard on the news yesterday that housing construction starts had fallen in November – down 3.7% across the U.S. from October and off 24% from November of last year – I was happy.  That’s right.  The dip in housing construction starts and permits is actually a good thing.

Here’s why: there are more homes on the market in Phoenix right now than there are buyers. If builders keep building new homes, those excess homes already sitting on the market continue to sit there – and that keeps prices down. 

If, instead, builders cut back on building and people start buying up the excess homes, we’ll more quickly get rid of that excess inventory, prices will come back up, and builders will build more homes again.

Here’s where we stand now, according to local economist Elliott Pollack (speaking at this year’s Economic Forecast Luncheon): “The number of units in the MLS went from less than 5,000 in April of 2005 to 45,000 by September of 2006.  Presently, the figure stands at approximately 55,000 units.  A normal level would be about 30,000 units.”

That’s why it’s a good thing if builders cut back on new home construction.  An article in the Washington Post, in addition to the latest housing starts numbers, confirmed that builders are doing just that.

From the Washington Post today: “David Seiders, chief economist for the builders, forecast that housing construction for this year will fall by 26 percent following a decline of 13 percent in 2006. He predicted a further decline of 19 percent in 2008 before a rebound in 2009.”

Builders need to bite the bullet and cut back on production until buyers eat away some of that excess inventory (bringing the number of homes in the MLS back down to a normal level of about 30,000 from today’s 55,000).  The sooner they do that, the sooner we’ll see the Phoenix-area real estate market heating up again.