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Is there a shadow over the good housing starts report?

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Home builders have been cautiously optimistic for the past few months and the numbers prove it. Brand new home construction for September was the highest the industry has seen in four years. That’s a 34 percent jump from last year.

But what about that shadow inventory of properties that are already bank-owned or in the process of foreclosure? If they’re still out there lurking, waiting to hit the market, why are builders constructing news homes again?

“The shadow inventory has really been drawn down and has become much less scary than it appeared a couple of years ago,” says Daren Blomquist, vice president of RealtyTrac, a foreclosure tracking firm. He says bank-owned properties are down 48 percent from January 2011, when they were at their peak.

America Underwater: See how many houses are in foreclosure or underwater in your state. VIEW THE INTERACTIVE MAP

“That’s no longer our concern,” says Stephen Paul, executive vice president of Mid-Atlantic Builders in Maryland. He says he’s no longer afraid of competition from a shadow inventory of used homes, but of something else. Paul says the new concern is “cost increases on the wholesale side for materials: dry wall and concrete and steel.”

Paul says he hasn’t seen those cost increases just yet, but thinks they’re inevitable as fuel prices keep rising. He spoke with me from a conference of home builders and says none of the attendees are that excited with the new housing starts, no matter how good they are. “We’re just a skeptical, rough kind of group, we’re not impressed by much,” he says.

Harvard housing economist Nicolas Retsinas says that skepticism makes sense. “These numbers are pretty dramatic increases,” says Retsinas, “but they’re dramatic increases because we started with a low base.” Retsinas says we need over a million new homes built a year to be at pre-recession, pre-bubble levels. That means we’re still around 200,000 short.

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