Housing Starts: Is a Bottom In Sight?

Housing Market Monitor by Dean Baker

For Immediate Release: January 23, 2008
Contact: Alan Barber, (202) 293-5380 x115

Foreclosure rates in California are up 421.2 percent from last year.

The annual rate of housing starts in December fell to 1,006,000, less than half the 2,068,000 rate for 2005. There were 1,354,000 starts for 2007 as a whole, a figure that was lower than even the most pessimistic forecasts.

While the sharp decline in starts has decimated the residential construction industry, it may actually be good news in the long-run. There remains an enormous over-supply of housing by every measure. The only way that this can be corrected is with a sharp cutback in construction. The annual rate of housing starts for December was lower than the rate for any year since 1959, including the recession years of 1982 and 1991. At this rate, inventories should start to be whittled down to more normal levels.

This process will take time, especially with the mortgage market in turmoil. The Homebuilders Association's Housing Market Index remains near its record low with a reading of 19 in January, up slightly from a downwardly revised figure of 18 for December. While the index showed modest improvements for the South and Midwest, the index for the west sunk by another 5 points to 13. Starts in the west for December were running at just a 229,000 annual rate, down almost 60 percent from the 525,000 rate for 2005. For 2007 as a whole, there were 336,000 starts in the west. With the collapse of bubble markets in San Diego, Phoenix and Las Vegas, the west has been hit especially hard.