Buyers Beware ... Housing Starts Are Falling

With respect to housing data, news is rarely positive or negative on a universal level. There's always two perspectives to consider, after all.

1. The home buyer's perspective
2. The home seller's perspective

Usually, when data is beneficial to one group, it's less beneficial to the other. This is true for rising home prices, average days on market and so forth.

Today, the group that gets the most benefit from data is the home seller group.

Published Thursday, a government report showed that Housing Starts fell 11 percent nationwide in March and also fell short of analyst expectations. A "Housing Start" is a new housing unit on which construction has started.

The press is calling this a stumbling block for the economy, but that's not exactly true.

Fewer Housing Starts last month means that fewer new homes will come on the market later this year. This is not necessarily bad news. Especially if you're planning to sell your home in the latter half of the year. With fewer homes for sale, the supply-and-demand curve should shift in favor of home sellers. This helps stabilize home prices at a time when they might otherwise be prone to fall.

If it's true that stable housing markets are key in an economic recovery, then fewer Housing Starts is actually a push in the right direction.

But there's more to the story (as always).

As footnoted in the Commerce Department's report, a statistical disclaimer states that the Housing Starts data's Margin of Error was so high that the report's conclusion is just a guess. Technically, the entire report is invalid anyway.

So, the government won't issue its final March 2009 Housing Starts data for months, but if the initial figures stick, home sellers may be in position to command higher sale prices later this year to the detriment of home buyers. It's basic economics.

And from a home seller's perspective, that news is good.

Have Home Prices Bottomed Out? Check Out Building Permits For A Clue.

There's a mixed message in February's Housing Starts data and it may be a good sign for home sellers in the near-term.

As reported by the government, new home construction rose by 22 percent last month. The press is running with the headline number, calling it evidence of a market bottom.

A more thorough inspection, however, reveals a different story.
The 22 percent figure applies to all homes built -- including apartment building units. Isolating residential units, February's housing starts rose by just 1 percent. Furthermore, the data's margin of error is 11 percent.

Statistically, we can't know if residential housing starts really rose last month, or if it fell instead. What we do know, though, is that the number of building permit requests rose.

Permits to build single-family homes were up 11 percent in February nationwide.

To home sellers, the rise in building permits may confirm that a housing market turnaround is already underway. Builders wouldn't be putting new inventory on the market, after all, without being sure of their ability to sell it 9 months hence.

The headline figure of 22 percent is attractive, but it's not completely honest. It's not the number of housing starts that matter so much right now as the number of housing permits. A rise in permits signals that homebuilders -- a group that's lost a lot of money in the last 2 years -- think the worst of housing is already over.

Housing Starts Drop Like A Lead Balloon--Thats Bad News For Homebuyers Next Year.

When it comes to housing data, there are always two questions to consider:

How does this impact buyers?
How does this impact sellers?

This is why housing data is rarely positive or negative on a universal level -- one group of Americans is going to see benefit.

Today, it's home sellers.

From the government, we learn that Housing Starts fell to their lowest levels since 1947 last month. A "Housing Start" is a new housing unit on which construction has started. The nation needs about 1.3 million new houses per year to service the needs of an increasing population and the razing of decaying older homes. Building permits are down, too.

This is all good news for people selling their homes in the coming months. As fewer homes are built nationwide, there is less inventory from which home buyers can choose. With fewer homes for sale shifts the supply-and-demand curve, adding a stronger support floor to home prices.

For home buyers, though, the Housing Starts data may not be as welcome.

With fewer new homes coming on the market, owners of "used" homes may feel less pressure to lower asking prices or to make other concessions. Home buyers often pay more when home supply is falling, or find that sellers are less willing to add "throw-ins" to a contract.

For all of the analysis that surrounds real estate data, in the end, home prices are based on the supply of homes versus the demand for homes. When supply outpaces demand, home prices fall, and vice verse.

Homebuilders know this and October's Housing Starts data reflects it.

For Home Buyers, Negotiating With Sellers May Be Getting Harder

If home prices are all about Supply and Demand curves, it looks like the national recovery is well-underway -- the housing inventory is falling in most major markets.

As reported by ZipRealty, the number of single-family homes for sale nationwide declined by 1.6 percent in October.

What's most interesting about the data, though, is that healthy markets like Seattle and Chicago played as much a part in reducing national home supplies as previously hard-hit cities like Miami and San Diego.

There are a few reasons for home supply dip:

Home buyers are keenly aware of the negotiation leverage they have over sellers and they know how to use it.

Banks are getting good at selling foreclosed homes

These two elements combined to help homes sell like hotcakes during what is typically a "slow" month in real estate, boding well for the housing market going forward. The figures are consistent with the other housing data from last month that showed more homes under contract and more homes selling.

But, wait. There's more!

Over the past few weeks, Chase Mortgage, CitiMortgage, Bank of America and Fannie Mae have all enacted some form of moratorium on home foreclosures. This, too, should lead to lower inventory levels because fewer homes will head for the auction block.

In every market, the value of real estate is based on scarcity.

If the number of homes for sale dwarf the number of active home buyers in that particular market, home prices are going to fall. They have to. It's basic economics. And, that's precisely what we've seen over the past few years -- home supply outpaced home demand for them.

But, based on the chart above, a series of data points from October, and the political pressure to help homeowners in need, expect for home supplies to fall in 2009, taking home buyer's negotiation leverage with it.