Housing, the good news is bad news

May 17th 2007
Housing Construction Pipeline Continues to Shrink
The news that moved the markets yesterday was a housing data release which was widely reported as "mixed" as in, some good news and some bad. The good news? Home builders constructed more homes in April in the U.S. compared with
March as housing starts rose 2.5% to an annual rate of 1.528 million units.

A month to month increase in home construction in the spring is as meaningful as month to month increases in the number of warm days. Reporting more warm days in April than in March is not exactly news. If the mean daily temperature in April fell short of mean daily April temperatures for the past 100 years by, say, by 25%, now that would be news.

So, the real news on housing starts? The Commerce Department data showed housing starts for April had declined by 25% compared to April last year; the good news was bad news. And the bad, bad news? Applications for building permits
fell by the biggest amount in 17 years.

The big news that the markets ignore is the implications of the collapse in housing permits issuance for the economy. In our 2007 forecast in October 2006 we noted that six of the past seven recessions followed a decline in housing permits of 20% to 30% over the previous year's issuance; the exception was the
2001 recession that followed the NASDAQ crash.

“Six of the past seven recessions followed a decline in housing permits of 20% to 30% over the previous year's issuance.”

In the face of a 25% reduction I would have to say “Place your head firmly between your knees and brace for a hard landing”. Many signs point to the fact that we are headed for deep water, this is just another. What mystifies me is the fact that so many people are going about their business as if the numbers ad up and everything is fine. Do they know something I don’t or is this simply a monkey trap.

‘Monkey Trap’
A monkey trap consists of a jar with a narrow neck tied to a tree branch with a fist size piece of fruit inside. The monkey puts his hand in, grabs the fruit, but holding the fruit, can no longer remove his hand and will steadfastly refuse to let go, even as the hunter approaches and captures the animal. The monkey becomes a victim of it’s own greed…

Vern