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February 16, 2007
| Bottom Falls Out Of New Housing Starts | Economy |
The bottom just fell out of starts for new residential construction in the US. For single-family homes, for example, January starts were down 38.9% compared to January a year ago.
Salon's Andrew Leonard spoke to housing economist Dean Baker. Excerpt:
But why are so many analysts willing to declare the bottom has been reached?"The long and short of it is: You have a lot of people who are anxious to see the turnaround, and looking desperately at single-month data. But I have a hard time seeing the conditions for that. There is still this huge overhang of unsold homes, along with a huge inventory of vacant homes, which is also an indication of possible financial stress. Foreclosures are rising very rapidly."
Baker's reference to foreclosures brought up the second big question about the ultimate ramifications of the housing bust. The collapse of the sub-prime lending sector has led some financial analysts to wonder whether there will be a cascade effect on Wall Street that hurts the investors who have been buying and selling complicated financial instruments — credit derivatives and other exotic fare — that are directly or indirectly tied to the health of the housing sector. Has risk been spread around enough that Wall Street can ride out any storm? Or has the moment of truth for a largely unregulated and opaque system finally arrived?
First Baker speculated that the trouble currently being experienced by sub-prime mortgage lenders will spread into standard loans. If prices continue to fall, many homeowners will be holding mortgages whose value is greater than what they can sell their home for, he said.
"The problem will go well beyond sub-prime. We are going to see higher default rates on standard loans."
That in turn will increase the pressure on institutions and investors who have been speculating on such things as mortgage-backed securities. It won't just be the riskiest bets that blow up in hedge fund investor faces, but even some that were considered "safe."
"But we really don't have any idea how exposed the hedge funds are. No one knows how much they are leveraged. But there must be a lot of people exposed to far more risk than we understand, because you don't get the really high returns [enjoyed by hedge funds] without exposing yourself to a lot of risk."
So what's going to happen?
Dean Baker doesn't know. No one knows!
"We are just shooting in the dark," he conceded. [Emphasis added]
December's warmth caused a unusual amount of building activity, masking the slowdown. January's weather in the US was normal for a January, though, so the January numbers can't be blamed on the weather.
Posted by Jonathan at February 16, 2007 02:49 PM
Comments
Here's a sad side note to the building slowdown: I live in a rural area of Western PA. Last year, the cattle rancher/farmer behind us sold his hundreds of acres to a developer who has spent months destroying the landscape, removing the trees, and leveling the hills. Personally I find what has happened to be an obscenity, but hey, it's progress, the yuppies can n ow move out here to find their country bunny way of lifestyle and commute to work in downtown Pittsburgh.
But I have this awful feeling that construction may not ever start. No lots have been sold, no foundations laid, the model showcase home is nowhere to be seen. The earthmovers have sat idle for weeks. Time is money, afterall.
Is this an isolated case or will there be many stories of natural habitat destroyed for McMansions that will never be built?
And what I am now forced to look at from my windows, I call it a Moonscape, may well be a man-made flood zone that will threaten the other homes and farms on the lower hillsides.
Posted by: Lane_in_PA at February 16, 2007 04:36 PM