Housing starts fell 15% in December to little more than half of the already depressed level of a year earlier. At an annual pace of 550,000, starts are far below 823,000 homes under construction and the 1,015,000 home completed in December. The current depressed level of starts is approximately consistent with the 331,000 level of new home sales because some homes are built for rental or are pre-sold. However, the inventory of new homes for sale is 12.9 months, far above the normal 4-6 months.

Hence, housing starts will have to fall further. If homebuilders operated like auto factories, they would have to shut down for 4 months to balance inventory and then resume production at a 550,000 annual pace. Some home builders are doing this. More will follow this path.

Realistically, the inventory overhang will be absorbed by a combination of reduced production and a pickup in sales from whatever congress decides to do to boost housing. We still expect a summer pickup in starts but this depends critically on action in Washington to either subsidize home buying or boost consumer confidence.

U.S. Residential Building Construction
(thousands of units)

(1) Monthly figures are seasonally adjusted at annual rates (SAAR figures).
(2) Based on a survey of homebuilders; excludes homes built under contract and multi-family rental units).
Forecasts and table: Reed Construction Data.