Why the home-building slump is good news

This blog doesn't generally cover the home-building industry that closely, because new home construction isn't a huge factor in big parts of the L.A. housing market. But economists consider home-building very important -- it contributes much more to GDP than the ongoing buying and selling of existing homes, news of which dominates our market.

For that reason, the accelerating slump in housing starts is a pretty big story. Floyd Norris at the New York Times calls the latest reading "horrid": "The picture is as ugly as it has ever been. But it may get worse .... To me, the wonder is that there are any housing starts at all. In significant parts of the country, it may be years before there is much demand for additional homes over the number already built."

Bad news, right? Not in the eyes of economist Dean Baker: "As noted before, the sharp downturn in starts is actually good news. There is a huge excess supply of housing at the moment, which just keeps expanding due to the flood of foreclosures. This inventory will most quickly be eroded if builders stop building new units. The sharper the downturn in construction, the quicker the inventory of homes on the market moves back to normal levels.

More from Baker's weekly analysis of the housing market: "In short, there is very little reason to expect any turnaround in the housing market any time soon. The continuing plunge in house prices will accelerate the pace of foreclosures in the second half of the year as the number of homeowners with negative equity soars and the extent to which these homeowners find themselves underwater increases. Homeowners may struggle to meet the mortgage on a home in which they are $10,000 underwater at the moment. They are less likely to make sacrifices to keep a home on which they are $100,000 underwater. Many more homeowners will find themselves in this situation by the end of the year."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo: AFP

Comments

[Rep. Mike]

Peter,
A lot of the large planned communities have to be constructed to meet the original specific plan approved by the city/county. If before the crash you finished 5000 of a 8000 housing community, even with deep cuts in price it is sometime more cost effective to finish then face the heavy fees and law suits from not finishing the remainder of the homes. In addition they are probably paying interest on the loan to get the land and need to start paying that principle down with any money they can get in. You just change the product and build the smallest, cheapest houses you can get the city/county to approve on resized lots. Look for houses with only 4 corners for the next 5 or 6 years.
Love the blog even though it chronicles the death of my field.

[Pat]

I fail to see how any of this is "good" news.

[Steve]

A cycle is always positive and negative. Where I live rents have increased substantially due to a huge increase in demand from those foreclosed on and/or cannot qualify. If you buy and hold there are some great deals due to over supply. I own five rental houses and never had a negative.

[Nelcisco]

Peter, the last sentence of the second paragraph you say
" It may be years before there is much demand for additional homes over the number already built" then I think about the Rice Ranch developement that I've mentioned before. Based on this article Rice Ranch is on its way to failure, in my humble opinion I don't thing they're using much wisdom, other developements in the central coast have haulted their projects but Rice seems convinced that they'll bring in the buyers just because what they're building is nice. can you check it out?its in Santa Maria or Orcutt its worth looking into.

Thanx