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Housing starts continue to improve

The residential construction industry suffered its sharpest and severest decline in recorded history beginning in 2006. Housing starts fell for three straight years, by over 75%. Residential construction fell, relative to the growth of GDP, by 60%, to its lowest level ever. If we had an overhang of houses back in 2005, that overhang has surely shrunk massively.

This recovery is as much about inventories as about anything. Housing inventories were exceedingly bloated back in 2005-2006, but they have now had years to get worked off. Inventories of just about everything else began to accumulate rapidly in late 2008 as global demand went into hiding, but now they are no longer falling and will soon need to be rebuilt. Housing construction is already up over 20% from last year's lows, and a slow recovery is quite likely to continue for the foreseeable future, especially since new household formations greatly exceed the current pace of new building activity. We're not talking about rebuilding inventories of housing yet, we're just talking about starting to keep up with demand so that inventories don't decline even further. None of this is very heroic, it's just the way business cycles work. To derail this process would be quite difficult.

So even though the upturn in housing starts looks pretty timid on this chart (nowhere near the status of a V-shaped recovery), it is part of a larger process that is quite significant. It pays to stay optimistic.

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