A perfect storm is brewing on the housing front. It will not bring destruction as one might expect in these difficult times, but rather a welcome rain for a thirsty nation. This storm will surprise just about everyone who believes the recovery will be painfully slow and imperceptible.

The forces contributing to this building storm were revealed by Greg Lewis, vice president of RISI at the recent Composite Panel Association spring meeting. First of all, housing starts have hit record lows not seen in decades. The most current data shows that we are at or near 500,000 annualized starts. Home prices have also fallen and interest rates are near historic lows, increasing “affordability” for potential home buyers. Everyone knows about the huge inventory of homes for sale and the foreclosures driving it, but quietly and without much fanfare, the inventory of available homes has decreased from an almost 13 month supply to just under 10, and it is continuing to fall. Existing home sales have fallen from an annualized rate of 7.4 million units in 2005 to under 4.5 million units in mid 2009. Housing starts will remain weak (although improving) through 2009 with an expected annualized rate near 750,000 units in the fourth quarter of this year.

When you consider that the underlying demand for new housing continues at nearly 1.75 million units, and that new homes can’t be built overnight, we are going to get caught in a housing shortage by mid-to-late 2010. The severity of the storm will depend on how long builders hold off on new construction and how far existing inventories fall. If the industry remains skittish for too long we’ll wake up one morning with short supply, increasing pent-up-demand and rising prices. And that might be the best thing that can happen.

The housing industry is a very cyclical business. The Joint Center for Housing Studies at Harvard University frequently state in their research that “the lack of residential investment is consistently and substantially the largest contributor to weakness in GDP.” In other words, it is not a downturn in the economy that leads housing lower, it is housing which leads the economy lower. This is clearly evident in the current recession. New home construction has been falling since the end of 2005. Fortunately, the reverse is also true...residential construction and its big brother remodeling will precede the recovery, drive an increase in GDP and lead us out of this recession.

History has shown that a dramatic cyclical drop in the housing industry has been followed by equally impressive advances in new home construction. The actual number of new homes for sale has been declining for 36 months from a peak in mid 2006. If a new cyclical advance in the housing market is just beginning, it can’t come soon enough. And if the perfect storm of pent-up demand, record low starts and falling inventory catch us with a supply problem in 2010, then so be it. I’d rather have that problem than the one we faced in the last three years. If the storm is coming...bring it on...and let it rain.

Whether you agree with me, or think I am all wet, I would enjoy hearing from you.

All the best,

John Aufderhaar • Publisher, Surface & Panel • aufderhaar@charter.net