Wednesday, March 18, 2009

The Housing Surge


It isn't quite clear what to think of the surge in new housing starts:

Initial construction of U.S. homes unexpectedly surged in February, after falling for eight months, according to a government report released Tuesday.

Housing starts rose to a seasonally adjusted annual rate of 583,000 last month, up 22% from a revised 477,000 in January, according to the Commerce Department. It was the first time housing starts increased since June, when they rose 11%.

In the aggregate this is troubling, as Shepardson notes:

"With new home sales still falling and the months' supply at a record, there is no reason for homebuilding to rise," wrote Ian Sheperdson, chief U.S. economist at High Frequency Economics in a research note. "This is a temporary rebound, not a recovery."

However, looking at the data by region, in the areas with the most overbuilt markets (the west), housing starts declined by 25%. This is a positive sign that confidence is returning and builders have decided it is time to take advantage of the huge decline in the cost of building materials.

Policymakers must be vigilant as move forward though, we cannot risk starting yet another unsustainable boom in housing. Part of this collapse of the housing market is unavoidable and really will be a good thing for long term economic stability.


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