The Turn in Housing

Those that believe housing woes will dominate as an influence on the markets have not thought about how in early 2009, the recent decline in inventories of unsold homes will accelerate (inventories have fallen 600k from the peak, bringing the excess down to about 1.6 million), such that the excess will have been cut in half.

Markets will then look a year forward toward a time when price cuts will clear inventories and create lasting stability in housing. How can we be sure? Housing starts are low and falling, and they are finally below the level of household formation, which runs 1.2 million per year.

At 950k, the creation of new dwellings is only about 750k because many starts are teardowns and such. This means builders are not building enough to keep up with household formation, which, unless people resort to caves, inevitably means that inventories will fall -- a shoe-in. This is the most powerful factor I can think of given that shelter is a basic necessity of life.

The question of whether home inventories will drop is no different from a demographic perspective as "will diaper makers sell more diapers next year given that there will be more babies in the world?" There are inevitabilities to anything related to the human condition and social norms, which in the case of shelter, means that if there are more people in the world, the need for shelter will increase.

It is an irrefutable fact, so with construction below what is needed to meet the needs of human beings, inventories will fall, whether through renting or buying. Barring a gigantic increase in homelessness, inventories I say, very forcefully, will fall meaningfully by the middle of 2009. They are already.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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