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Why the home-building slump is good news

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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.’

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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

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