New Home Starts - It's The Job Market Stupid!
Today, the report on new home starts was released. Bottom line - it stunk, just not as bad as last week, but we are still well below normal recessionary levels. According to the report today housing starts rose more than expected and permits for future construction touched a five month high in May - however, there are a lot of issues with the report as it doesn't include how many houses actually got built once they were permitted nor how many houses were sold once they were built. Inventories of new homes remain high and the oversupply of previously owned houses, especially foreclosed properties which sell well below their value, is dampening new home construction. A survey on Wednesday showed sentiment among home builders at its lowest in nine months in June.
However, it is more than just a glut of pre-owned homes and foreclosures that is causing suppression in new home building which has been the leader of EVERY previous economic recovery. It is jobs or really the lack thereof. While the media continues to spin every little uptick in the numbers as a sign of a bottom or the beginning of a recovery, the reality is, we are a very long way from that happening as long as unemployment remains high. High unemployment is crimping people's ability to buy a new home - lenders have a hard time loaning money to unemployed individuals these days. Also, most of the pre-owned homes that are for sale, as well as foreclosures, are due to job losses or directly impacted by the financial and economic downturn. Most of these individuals are just trying to get out of homes which they are underwater on and they are not in the market to buy new homes.
Finally, there are the 20% of individuals who are just underwater on their mortgage. This leads to lack of mobility as they either are forced to short sell at a loss or stay in the home. Since most choose to stay in their home they can now not move to a new area for a better job...they are stuck.
All of these issues lead back to the key foundation of the importance of job creation in the economy. With high and sustained levels of unemployment it is very hard for consumers to provide the demand necessary to spur production. Without higher demands on production there is little reason to create jobs or increase wages.
Finally, with prices still to high to spur speculative investment demand, massive amounts of inventory sitting on the books of banks tied up in the foreclosure fiasco waiting to come to market, a lack of easy credit for buyers and low levels of household formation it is going to be a difficult road to get the housing market back on its feet and it will take even a longer amount of time before people began to think of housing as an "investment" again.
People have confused the "American Dream" over the last decade with home ownership. That is NOT the "American Dream". The dream was to come to America for an opportunity, the freedom to create, the ability to innovate and for a system that rewarded creativity, innovation and hard work with increased wealth. Home ownership was the reward for achieving that "American Dream". Without a job or an economy that can foster innovation, creativity or drive, the "American Dream" is now more elusive than ever. Pro-growth business policies and removal of barriers to growth will certainly help businesses shore up loose ends but without the end demand from consumers - job creation will remain low. As a result of a lack of jobs, lower real wages and a lack of mobility - the real estate market will remain mired in a funk for far longer than most expect.