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Housing Starts Have A Long Way To Go To Reach Normalcy

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Current housing starts

As we mentioned earlier in this series, residential home construction has been depressed for a long time. Prior to the housing bust, housing starts averaged ~1.5 million units per year. In the past ten years, they’ve averaged well below that number—around 1.3 million units a year.

Housing Starts - LT

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When you consider population growth, you can see that starts have been depressed for quite some time

Following the collapse, we saw starts average ~687,000 units per year with a low of under half a million. That’s a tremendously depressed level. From 2006 to 2008, starts collapsed from 2.273 million to 487,000. Housing starts finally broke a one-million unit pace on a consistent basis this spring.

We spent a total of 56 straight months with starts below 1 million. That’s an astounding number. Even now, we’re seeing starts of only 1.1 million a year, which is still a highly depressed level.

Historical perspective

To put these numbers into historical perspective, at the lowest point of the 1991–1992 recession, starts bottomed out at 798,000 in January 1991, and were back above 1 million a few months later. That kicked off a homebuilding boom when 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 1981, and were back above 1 million by August 1982.

During the 1991–1992 recession, we spent a total of seven months with starts below 1 million units. During the 1981–1982 recession, we spent a total of ten straight months with starts below 1 million units. In the 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 correction. You could argue that it was necessary to correct the overbuilding of the bubble years.

But if you look at the chart above, the peak of building in 2006 was similar to other cyclical peaks we saw in the early 1980s and late 1970s. 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 homebuilders such as Lennar Corporation (LEN), Pulte Homes, Inc. (PHM), D.R. Horton, Inc. (DHI), and Toll Brothers Inc. (TOL). You should also consider the Standard & Poor’s depositary receipt (or SPDR) homebuilder ETF (XHB).

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