Housing Starts Hurting

Back and Forth on Housing Starts

Economic hard times inspire two contradictory responses. One is to simply to want it to stop hurting. The other is to want the system purged and cleansed, at whatever up-front cost. The two are not mutually exclusive; indeed it's quite common to wish for each in turn, or even simoultaneously. But they point in opposite directions, and underly pretty much all the debate we're hearing among economists, policymakers and talk-show guests—such as this one .

Sorting them out, however, is necessary before you can intepret news such as today's about U.S. homebuilding. From Aaron Smith:

Builders slashed housing starts and residential building permits in September to their lowest level since early 1991 as they worked to realign supply and demand. Housing starts dropped 6.3% to an annual rate of 817,000 units, and permits fell 8.3% to an annualized pace of 786,000 units. The rate of decline in homebuilding has clearly intensified: Housing starts over the past three months have contracted at a 68.3% annualized rate, the worst such reading since March 1980.

You can see this as disastrous, an economic train wreck. All those lost housing jobs, all that idle investment in land, lumber and equipment. The ripple effects—on employment, retail sales, overall growth—will be severe. Somebody—like maybe a presidential candidate?—should propose a plan to boost housing construction and save the economy.

Or not. As Aaron also writes:

Although significant progress has been made in lowering the supply of new homes to a level more consistent with the current low demand, we think further cutbacks in homebuilding will be forthcoming to more quickly draw down inventories.

Progress? Yes. Remember that what ails the economy—the financial side of it, at least—stems from the plunge in house prices that followed the end of the recent bubble. Rising defaults, underwater mortgages, frozen securities markets and the global banking crisis all began there. Any recovery, therefore, depends on house prices stabilizing. But house prices can't stabilize if builders keep pumping inventory into an already glutted market. Something's got to give. And the faster and deeper it gives, the sooner we can begin to climb out of this hole.

Let me amend that. The faster and deeper it gives, up to a certain point. That being the point at which all those lost construction jobs and all that idle investment is enough to sink demand for new houses, so that even as prices plummet and "affordability" rises in some technical sense, it still doesn't revive the economy.

At which point we abandon all talk about system-cleansing, and just hope someone can make it stop hurting.

Andrew Cassel in West Chester on October 17 at 11:45 AM