Housing Starts 2009 Forecast (Morningstar)
Morningstar analyst Eric Landry gives his forecast for 2009 housing starts and the implications for the supply/demand picture.
Bob Johnson: Good afternoon! This is Bob Johnson, associate director of economic analysis at Morning Star. Yesterday we had some pretty dire housing number, housing starts numbers out. They were actually—the starts were at 550,000 on an annual rate basis which is a pretty negative number. And I have with me today, Eric Landry, associate director of Industrials and Home Building and to discuss that number with me. Eric, what does that 550,000 starts number mean?
Eric Landry: Hey Bob, well unfortunately, yesterday was a historic day and that it marked the official naming of 2008 as the worst year in housing production in recorded history and that goes back to 1959. So, it wasn’t a great day for the housing sector even though everybody already knew it. Nonetheless, 2008 will go in the book as the worst year ever until that is 2009 is put in a box.
Bob Johnson: Okay, well you’ve got the number there at 550,000 starts on an annualize basis. What might you look for the whole year in 2009?
Eric Landry: Yeah, unfortunately I don’t look for much. If we look at that number, we combine that from the data that we get from our home builders. Order books are down significantly virtually across the borders, a couple here in order that we could talk about later that are actually up. But buying large—the order books indicate to us that total starts this year will probably be lucky to be more than 600,000 units which is a very, very significant number in the fact that it’s never before have numbers that’s small than recorded. It’s not even close.
Bob Johnson: Okay, and again, for contacts what was that number in 08 and maybe 07?
Eric Landry: 08, it was 900,000. Give or take a few thousand and traditionally when starts fall to about a million units that marks the bottom. It marked the bottom in 82, 91 and mid 70s. Every single bottom has been marked by a million units of construction that year. This year in 2009 as we sit here we’re looking for about 60% of that if we’re lucky. It could be in lower.
Bob Johnson: Wow! Well, Eric what’s that? Is there any bright spot in that number? That number will starts?
Eric Landry: Well, you’ve got to look hard. But you know the bright spot is that from probably 2003 to 2006 there was too much supply being put on to the market. That is not the story anymore. If you look at the demand which is made up of three components that’s basically household formation through people growing into that age and immigration—
Bob Johnson: So, what type of number might that be?
Eric Landry: It’s about a million three to a million four a year.
Bob Johnson: Okay, so you’re talking 600,000 starts but you’re talking caller or the group of people of a certain age be—
Eric Landry: Yes, a couple of caveats with that. First all, that’s not all of demand. You have to add on top of that houses that are removed from hurricanes, fire if you want that, that’s typically a couple hundred thousand and then another element which is probably going to be muted this year is second home demand and I don’t see much of that given the economic circumstances. But if you add the first two, you can easily come up with the number of a million five, million six, million seven somewhere around there is aggregate demand for housing over the course of several years.
Unfortunately, when there’s economic stress that household formation number gets compressed as people stay home you know 20 something don’t leave the mess people put off getting married and what not so you know it’s looking like last year it was somewhere on half of that normal right so—
Bob Johnson: An hour look at any with the worst number in 2009—
Eric Landry: Yeah.
Bob Johnson: But then maybe given the natural demand.
Eric Landry: It causes pent up demand in subsequent year so we’re going to have to fight to quite a bit a week to see over the next four, maybe six, eight quarters, who knows but you know on the other side there will be demands for housing.
Bob Johnson: And pretty dramatic demand potentially.
Eric Landry: Yeah, right.
Bob Johnson: Eric, as you look at the housing industry you know they put out the starts number and a lot of people kind of focus on that, but I know you have an indicators to your favorite indicator, what is that when you look a house?
Eric Landry: I guess least favor to have. Given the data these days but what’s important to look at is the actual number of home for sale out there existing homes, new homes which is what starts look at is roughly 10% of the market so it’s very small.
Bob Johnson: Yeah.
Eric Landry: But right now the problem is that there’s 4.2 million existing homes for sale that are putting just a huge dark cloud over any type of pricing and you can see that in the case—next is everything the price is going down. So, what you look for, for any increment or positives is a degradation in that 4.2 million of existing home inventory.
Bob Johnson: Okay, now what’s been the trend over the last year with that number?
Eric Landry: Well, luckily the starts had been acting as a kind of force to the foreclosures and we have not seen any growth in that inventory. In fact it’s come down just a little bit over the recent months.
Bob Johnson: Yeah.
Eric Landry: So, that’s a good thing and that has been positive throughout 2008 as we’ve had this huge foreclosure activity. So, once that starts to come down then we can start to hopefully find the bottom of the pricing at some point or another.
Bob Johnson: Okay, so when does this inventory number come out? Who supplies it? And what’s kind of a good number?
Eric Landry: This is next week. It’s a National Association of Realtors.
Bob Johnson: Okay.
Eric Landry: You can just Google existing home sales or National Association of Realtors, and you know like I said a good number will be anything significant less than 4.2 million. Now, I’ve got to warn you about, it’s not going to happen overnight.
Bob Johnson: Right.
Eric Landry: It’s going to be something where you’re just going to see gradual reduction, hopefully cross your fingers.
Bob Johnson: Yeah.
Eric Landry: It looks pretty good when I looked at the individual MSA which is the Metropolitan Statistical Area it’s basically cities. It looks like in a lot of the bigger MSAs, the inventories are actually coming down. Now, the caveat is that people just taking home to after market because of scourge.
Bob Johnson: Right.
Eric Landry: Creating what’s called a shadow inventory. We don’t know that number yet, but at least on the surface, the inventory numbers are mildly encouraging. They are not overly encouraging I would just say, you know, mild encouraging.
Bob Johnson: Okay, well, Eric thank you for being with us today. And again, to kind of summarize, to start certainly warn a pretty number, the inventory numbers we’re looking for next week hopefully that number started to stabilize a little bit and so maybe we can get going the right direction in the housing market. Thanks again—
Housing Starts 2009 Forecast (Morningstar)
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