New Home Building Plunges

New homes building data was released for January and the news media was all over the horribly negative numbers which are down 48 percent from a year ago and were said to hit a new all-time low. And, as you can see from the following scary graph, home building has fallen off a cliff in recent years and are down more than 75 percent from their mid-2000s peak (and this despite the fact that as you can see mortgage interest rates are at very low levels).

 

 

 
Once again, news reports are lacking a historic perspective so here it is.

Take a look at this graph which shows new housing starts over many good and bad economic cycles over the past 50 years.


 


We can see several important things from this long-term data:

• Housing starts are quite volatile and when they drop during a recession, they really drop (the early to mid-1970s period looks very much like the current environment).
• Note that in the most recent good times when housing starts were increasing that it stretched over about 15 years from the early 1990s through the mid-2000s, much longer than past good periods. Also note the lack of a major decline during the recession in the early 2000s. So it has been an unusually long time since housing starts suffered a major decline and thus not surprising that they have fallen as steeply as they have.
• The steep decline in new home building serves a purpose - it dramatically and more quickly reduces the supply of new homes coming onto the market. Ultimately, this will contribute to a rebound in home building in the future.

Another way to get historic perspective on this current slump in new home building is to look at the long-term stock price charts of some of the bigger new home builders. Check out this long-term chart of Toll Brothers where you can see that while the stock has suffered a major decline in recent years, it's still in a long-term up-trend since the late 1980s. This is also the case when looking at big home builder Pulte's chart.