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Are housing starts a sign of the bottom?

A construction worker measures a window as he works on a new home at the Olson Homes Garden Walk development in Hayward, Calif.

TEXT OF STORY

Kai Ryssdal: This is going to sound like a rhetorical question, but I promise I'm being completely serious. If a given economic indicator has been abysmal for months, then how big a deal is it that said indicator has become less abysmal? The housing news today is one of those 'depends on how you look at it' stories. After a dismal April, home construction did surprisingly well in May. But that's really only half the story as Marketplace's Dan Grech explains.


DAN GRECH: The May figures show the biggest rise in housing starts came in the regions hardest hit by the housing bust. Economist Edward Leamer says the biggest jumps were in the West and the South.

EDWARD LEAMER: And that's suggestive that we're at or near the bottom right now and makes us hopeful that the official recession will end in the middle of the summer.

Still, May was the fourth-worst month for new construction in nearly half a century. Housing starts are down 75 percent from their boom-time peak. Lawrence Yun is chief economist with the National Association of Realtors.

LAWRENCE YUN: The latest increase is just a bounce from a rock-bottom level of activity that we saw in April.

Yun says a glut of foreclosed homes has driven down prices and brought back buyers. Builders are responding to that.

YUN: But the bad news is builders are adding more inventory to the already existing high inventory levels.

With so many existing homes already on the market, why would anyone build?
Chris Mayer is a senior vice dean at Columbia Business School.

CHRIS MAYER: They're people who want to build their dream house, and construction costs are incredibly low, and they view this as an opportunity to do that. You have some builders who are finishing up projects where they got financing. And even though it doesn't make economic sense for them to do it, they're going to finish up the project anyway.

Housing represents only three percent of the U.S. economy. But Michael Englund, with the consulting firm Action Economics, says economists consider housing a bellwether.

MICHAEL ENGLUND: Housing is an extra sensitive sector to longer-term expectations and growth prospects and to interest rates. It's essentially the canary in the coal mine.

Englund warns the light at the end of this tunnel could still be months away.

I'm Dan Grech for Marketplace.

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