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Mortgage, housing update

August housing starts were somewhat weaker than expected (571K vs. 590K), but building permits (which point to future housing starts were a bit stronger than expected (620K vs. 590K), so on balance there's no news here. The larger story is told in the charts above. Housing starts have been bouncing along the bottom of their worst nightmare collapse, and this has been going on for over two and a half years. One chapter of the big story is that housing starts have hit bottom; if they were going to go lower, they would have done so by now. The other chapter is that housing starts are going to have to increase by leaps and bounds over the next several years, if only just to catch up to the demands of a growing population.

The longer starts remain at current levels, in fact, the higher the probability that we could be experiencing a general housing shortage within a few years, since the rate of family formations is running well above the current level of starts. That future housing shortage might collide with an abundance of money (if the Fed is slow to mop up the massive amounts of excess bank reserves it has created) to produce another major rise in housing prices. We can't know the timing of the next upturn in the housing cycle, but increasingly, the question is not whether housing prices will rise, but by how much.

When you can borrow at historically low, long-term fixed rates of 4-4.5% to buy into what could be an impressive runup in housing prices, it matters little whether prices have reached their lows or whether they might drift somewhat lower before heading higher.

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