Monday, January 21, 2008

Housing Starts At An All Time Low: Good News Or Bad News?

It seems like, with each new report about housing starts, much of the media paints a dimmer picture. But is this news really such a bad thing? I argue that most investors should be grateful for the fact these numbers are getting worse.

When the media reports on the housing start numbers, they are doing so with the economy in mind. Naturally, the more houses get built, the more money cycles through the economy. In this way, housing starts are a powerful barometer of the economy's health.

For investors, though, the picture doesn’t look quite the same. Investors want to see the supply of homes equal to, or even short of, demand. When this happens, the price of homes go up. This is great news for investors who already own property. When housing starts get too high and create excessive supply, the prices of homes will drop, which is what has been happing lately in many real estate markets.

In markets such as Phoenix and Las Vegas, builders overshot housing demand by several years. Even though the economies of those markets are strong and growing rapidly, there just isn’t enough demand for the amount of available homes. For that reason, investors want to see as little inventory added as possible. The less new inventory is added, the more existing inventory will get used up, and the more valuable that existing inventory becomes.

So the next time you read a news report that cries about the fact housing starts are a record lows, instead of grabbing your box of tissue, reach for a nice bottle of champagne and celebrate the fact that less new home construction means more demand for existing homes--homes like yours.

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