Housing outlook: Don't fly blind

D scexrr-v. AN TNDUSTRY ANALysr l\asked me to address a simple but very important question: Why does every forecast for housing starts have them hitting 1.5 million units again?

The logic for the rebound was just not self-evident to him, given what is happening right now. Just as it is difficult to see a housing start decline during the boom, it is even more difficult to see a rebound from an extremely deep hole. The depth of the hole is evident in the chart below, which shows the history of conventional housing starts back to 1910.

Before answering the question, it is important to understand the unique character of this particular housing cycle. First, note that there is not a predictable cycle to housing starts. Housing cycles in the 1970s were about every three to five years, and we thought that was the rule. That rule was broken in the 1980s.

Then we entered a particularly prosperous period. Housing starts were relatively stable and trended up from 1991-2005. which led us to think housing cycles were a thing of the past. Second, unlike every other major housing cycle, the cunent one was nol caused by tight monetary policy or high interest rates. Historically, when the Federal Reserve reversed course and lowered rates, housing rebounded quickly and dramatically. This clearly happened in 1983-1985 after the grim downturn in 1978-1982

Obviously it is not happening this time. All the rules were broken this time. The economic recession in 2000200 I was not caused by tight money either, but rather the popping of the stock market bubble. Fed actions to stabilize the economy in 2002-2004 helped promote easy credit and the boom in new creative financing instruments. This fueled the housing bubble. Between 2003 and 2006, the industry accrued two "hidden" inventories.

Many of us became concerned about the two types of buyers who were merely holding an ownership position, but would eventually be forced to sell-similar to building excess inventory. First, because of