Quick Perspective Review on Housing Starts and Recessions

People with the demand-side (wrong) model of why home prices are elevated tend to see prices as cyclically unsustainable. They are propped up by Fed stimulus, low interest rates, federal programs, speculators, private equity, etc. If you have that view, then, eventually, it seems, the comeuppance will have to arrive. Probably soon. And 2008 is example numero uno of how hard it can hit and how all the dumb money that is always in denial about it will be knocked out before they even see what’s coming.

Most of the time when people ask me about housing or the economy, they are operating with some version of that story in their heads. Home prices have been elevated for some time, so I have been replying to that sort of question for some time - usually from someone burdened with the unfortunate stress that the demand-side model creates, worried that home values might just collapse at any time and take the economy with them.

One way I would try to ease their minds is to point out that the collapse in home prices that began in late 2007 was actually a relatively late development in the broad scheme of things.

New home sales had started to drop sharply by mid-2005. Housing starts followed soon after. Cancellations at homebuilders had been very high by mid-2006. If you’re worried about a repeat of 2008, you should have a couple years’ worth of clues that we are heading in that direction.

The reason 2008 happened was because it was popular and policymakers forced it to happen. But, even if you think it was an accident, or some unavoidable market development, you had a long time to get out of the way before it hit.

For much of the early days of this newsletter, I have been seemingly making excuses for those leading indicators. Well, sure, mortgage rates are rising, but that won’t really matter much to construction and prices. Well, sure, starts and sales have been declining, but that is because they were unsustainably high, and so completions will not follow them down. Well, sure, homebuilder cancellations are really high, but that’s just an idiosyncratic shock from the sharp rise in mortgage rates. Cancellations will correct back to normal without much damage to the broader market.

Those excuses seem to have turned out to be accurate forecasts. Construction and home prices look to be pretty stable. It occurs to me that there is an insight lurking in that original point about leading indicators giving us a big head start on seeing a coming recession.