New Home Building Plunges

publication date: Feb 27, 2009
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New homes building data was released for January and the news media was all over the horribly negative numbers which are down 48 percent from a year ago and were said to hit a new all-time low. And, as you can see from the following scary graph, home building has fallen off a cliff in recent years and are down more than 75 percent from their mid-2000s peak (and this despite the fact that as you can see mortgage interest rates are at very low levels).

 
[Chart]
 

 
Once again, news reports are lacking a historic perspective so here it is.

Take a look at this graph which shows new housing starts over many good and bad economic cycles over the past 50 years.


Graph: New Private Housing Units Authorized by Building Permit 


We can see several important things from this long-term data:

  • Housing starts are quite volatile and when they drop during a recession, they really drop (the early to mid-1970s period looks very much like the current environment).
  • Note that in the most recent good times when housing starts were increasing that it stretched over about 15 years from the early 1990s through the mid-2000s, much longer than past good periods. Also note the lack of a major decline during the recession in the early 2000s. So it has been an unusually long time since housing starts suffered a major decline and thus not surprising that they have fallen as steeply as they have.
  • The steep decline in new home building serves a purpose - it dramatically and more quickly reduces the supply of new homes coming onto the market. Ultimately, this will contribute to a rebound in home building in the future.

Another way to get historic perspective on this current slump in new home building is to look at the long-term stock price charts of some of the bigger new home builders. Check out this long-term chart of Toll Brothers where you can see that while the stock has suffered a major decline in recent years, it's still in a long-term up-trend since the late 1980s. This is also the case when looking at big home builder Pulte's chart

 




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Copyright Eric Tyson, 2008 - 2014 all rights reserved.

Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.

 

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