Tuesday, July 20, 2004

Housing: New Starts Fall in June

MSNB it seems that the economic establishment is slowly edging itself toward acknowledging that the actual data indicates something less than a "banner year". The latest sign was a sharp drop in housing starts.

The number of housing projects that builders broke ground on clocked in at a seasonally adjusted annual rate of 1.80 million units, an 8.5 percent drop from May’s level, the Commerce Department reported Tuesday.

Although the 1.80 million pace was the lowest since May 2003 and was weaker than economists expected, it still represented a respectable level of activity.

Housing construction in May rose by 0.4 percent from the previous month, according to revised figures. That turned out to be stronger than the decline previously estimated.

Tuesday’s report is consistent with other economic data— including retail sales and the nation’s employment situation — that suggested the economy hit a rough patch in June. Analysts, however, are confident that’s just a temporary lull, rather than a sign of trouble ahead for the economic recovery.

Given this information will we have a housing bubble? Certainly if Greenspan continues backing away from his telegraphed 25 basis point rise per every six week FOMC meeting increment that he had promoted earlier this year it will. As the markets thought that he would back off, the mortgage rates fell and this will likely stabilize the housing starts in the next few months. Isn't that a good thing? Well it depends. We have the highest rate of housing ownership in a long time. That's a good thing unless low interest rates have allowed more people to own houses than can really afford to. When marginal homebuyers go on the market and the economy settles again, as it's bound to, a lot of those mortgages will go up in foreclosures. Indeed the consumer credit expansion and the rate of bankruptcies is breath-taking.

Greenspan should have stuck to his rate rise schedule. Yes it would have meant that there would have been pain, but the alternative is not to remove the business cycle but to create a bubble whose later sharp correction would not be a "soft landing". A soft landing now or a hard one later, and Greenspan seems poised to do the later. We should know after his testimony today.


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