Can residential construction spending drive the economy?
Housing starts have been depressed for a long time
As mentioned earlier in this series, residential home construction has been depressed for a long time. Prior to the housing bust, we had averaged about 1.5 million units per year. In the past ten years, we’ve averaged well below that number—around 1.3 million units a year. When you consider population growth, you can see that starts have been depressed for quite some time.
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Following the collapse, we saw starts average around 687,000 units per year, with a low of under half a million. That is a tremendously depressed level. From 2006 to 2008, starts collapsed from 2.273 million to 487,000. We broke a 1 million unit pace in March, and then again in November. We spent a total of 51 months with starts below 1 million. That is an astounding number
To put these numbers in perspective, at the nadir of the 1991–1992 recession, we bottomed at 798,000 in January of 1991 and were back above 1 million in April. This kicked off a homebuilding boom where starts peaked at 2.273 million in 2006. At the depth of the 1981–1982 recession (in many ways more severe than this one), starts bottomed at 837,000 in November of 1981 and were back above 1 million by August of 1982. So during the 1991–1992 recession, we spent a total of seven months with starts below 1 million units. In the 1981–1982 recession, we spent a total of ten straight months with starts below 1 million units. This latest recession, we spent a total of 51 straight months with starts below 1 million.
Of course, we did have a residential real estate bubble that needed to correct, and you could argue that this was necessary to correct the overbuilding of the bubble years. However, if you look at the chart, the peak of building in 2006 was similar to other cyclical peaks we saw in the early ’80s and the late ’70s. In other words, the excess inventory that was built during the boom years has largely been worked off. Even if we only get back to historical levels, there’s a lot of earnings potential for the homebuilders like Lennar (LEN), KB Home (KBH), PulteGroup (PHM), Standard Pacific (SPF), and Toll Brothers (TOL).