I’m always on the lookout for economic trends and market indicators that tell a story. It’s why I read four newspapers a day—not only to get ideas but also to formulate investment strategies by tracking political, business and economic news.
Ever since the housing bubble burst in 2006, contributing to the subsequent recession, market-watchers have been closely monitoring housing sales for telltale signs of an economic recovery. Just this week, there was mixed news about June home prices rising in Los Angeles for the first time in six years, yet new home sales nationally posted the biggest drop in more than a year.
But there was once piece of news I viewed as most encouraging: housing starts rose to their highest level since October 2008.
Housing starts—the total number of houses that have begun to be built in a particular period—has always been the most important indicator for the homebuilding market. It’s also a great bellwether for the economy as a whole, too.
Homebuilding creates jobs for construction workers, electricians, plumbers, and others. Right now we have an 18 percent unemployment rate among construction workers, and for them, the spike in starts is particularly encouraging. But the impact of housing goes far beyond that. Customers buying a home need carpet, furniture, landscaping, and more, helping generate healthy consumer spending. The multiplier effect of new home construction boosts the entire economy, and has for decades, as I saw during my years at Kaufman and Broad.
A full recovery may still be a few years off, and the days of double-digit real estate appreciation are probably decades away, if they ever return. In Southern California, for example, overbuilding in outlying areas means there is still too much supply relative to demand for homes. It will take time for regions like Palmdale or Moreno Valley to grow again. In the next few years, I predict that most building will occur closer to central cities or filling in between denser suburbs.
But as home prices firm up and consumers grow more confident, the housing market will rise again. And that’s a good thing not just for builders, but for all Americans.