Housing construction has finally turned from being a drag on economic growth to a supporter; however, both supply and demand factors will likely prevent a robust recovery. After peaking in January 2006 at 1836K, single-family housing starts have corrected by a historic 80% before bottoming in February. At the same time, the supply of new homes on the market has also corrected sharply, falling by over 50% from the peak from mid-2006, to a pace that may soon be outstripped by sales. While some maintain sluggish estimates for new home sales, the months’ supply figure (now at 8.8 months) is set to reach the 6-7 months level by early 2010. Given that this range is consistent with a balanced market, new home prices are set to stabilize before long.

Signs of convincing and sustainable turn
Because of these trends, market now believes that the homebuilding sector shows signs of a convincing and sustainable turn, albeit one that is less robust than in prior cycles. The typical recovery one year after the trough in housing starts has averaged an increase of 70% – some are expecting a total gain of closer to 50%.

From the February low this year, single-family starts have already rebounded by 37% with outsized strength in the West (up 75%), sizable turns in the Northeast (+54%) and Midwest (+56%) and a more subdued result in the South (+18%). The sub par rebound in the South is not surprising given the amount of overbuilding in that region that led to a massive inventory overhang. From depressed levels, upside to be broad-based While all 50 states experienced a correction in housing starts of at least 75% from their respective peaks, all have now shown growth over the past few months. Even those in the South appear to have upside going forward, with Florida topping the list of potential growers before returning to its long-term average level of activity. In fact, several of the largest states (Texas, North Carolina, Georgia) have yet to show any meaningful turn in homebuilding but appear poised to do so going forward. All three states experienced less overbuilding and less price appreciation during the housing market bubble (relative to other states) but have experienced an equally massive correction in homebuilding. This also applies to construction in the Northeast and Midwest where the largest rebounds have occurred to date – two regions which together account for only 32% of national activity. While both still have significant upside, the next leg up in homebuilding could come from states in the South (a region that accounts for almost 50% of housing starts activity in the US) and the West. Residential investment — now a contributor to growth Following this weeks’ better than expected rise in single-family housing starts and existing home sales.

Housing starts trends & upside for the most relevant states