Almost three years into the housing downturn (remember Housing Starts first turned negative in January 2006), the inventory of new homes for sale is finally starting to adjust in a meaningful manner.
Take a look at the picture below. As is typical during any stock adjustment, inventories rose during the first few months of the downturn. What is not typical is the behavior of the stock of unsold homes over the next 18 months. Inventories of homes for sale did not decline whatsoever, on average, between January 2006 and the summer of 2007.
Of course, as we have learned with so many series during this recession, falling to a low level does not mean the series is near the bottom. I don't have a crystal ball, but we can look at the series during previous downturns and make judgements about where it is likely to end up in this downturn.
Here is a long time series of houses for sale.
Housing inventories have a long way to go before they finish their adjustment, but the end may be in sight. If the number of homes for sale continues to fall at its 2008 average pace, the inventory of unsold new homes will hit its bottom (maybe 250k?) in March 2010 or in about 16 more months.
I am assuming that inventories only need to fall as far as they did during the 1982 downturn. As of right now, this recession looks worse than that one so it may have to fall farther but this number feels right.
The number of months left seems very large. That is why inventory overhangs are such a problem--remember the fiber optics networks in 2000. But, even if I use a much larger number for adjustment, we still need several months to work through the excess. For example, if I use October's monumental fall of 8 percent, the inventory adjustment takes another 6 months. No way am I that optimistic.
There is a silver lining, however, even in the 16-month adjustment scenario, my base case.
Housing starts stop falling long before the inventory adjustment is complete (see chart below - starts are the jagged black line). In every previous housing-market downturn, housing starts stopped falling about one full year before the inventory of new homes reached its bottom.
And, once housing starts stop falling so does the labor market. This means in about three months (four more labor reports), sometime in the very early spring, the labor market will stop getting worse: we will reach the worst of the month-on-month declines. A few months after that employment will start growing again. According to this forecast, we will see positive job growth as soon as next summer.
Does this mean the recession is going to end in mid-2009? Maybe.
Maybe not. All of the above is predicated on this downturn looking something similar to all of the other post-war recessions. The gorilla in the room right now is the large number of foreclosures. These foreclosures are adding to housing inventory in a manner very similar to new housing (they are empty and must be sold) and the number of foreclosures is at record levels. Therefore, these estimates may be wildly optimistic. My guess, and it is nothing more than a guess, is that the foreclosure crisis is good for about 4 to 6 months extra adjustment.
We shall see.
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