Housing Starts; Why It Won't Be Business As Usual

Some will blame current economic pressure on a subprime market that was more enthusiastic than realistic. Housing starts are down with consumer confidence following suit. According to The Conference Board its “March [2007] consumer confidence index fell to 107.2, the lowest level since November and a decline that was larger than Wall Street expected.”

The good news is the Dow has performed well in the midst of this news while labor statistics remain strong.

Federal Reserve Chairman Ben Bernanke's testimony before Congress on March 28th, 2007 found him concerned about the impact of defaults on subprime loans. Bernanke indicated that, “Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes.”

Interestingly, news of the ‘bubble pop’ in subprime lending is rippling around the world. The European Union as well as Australia have been monitoring this leading economic indicator.

Chairman Bernanke indicated subprime loans account for about 10% of all mortgages. If banks have lost their ability to derive a profit from these loans it may signal a slow down in this sector of lending adding additional pressure to housing starts along with the potential for loan default. This news adds pressure to what had appeared to be a relatively stable economy.

The impact of a slow down in housing starts may have ramifications for business. Michael Allen is the CEO and founder of Allen Associates Executive Search. Allen said, "I receive about four or five calls a week from CEO's worried about plummeting housing starts. We believe that North American building products manufactures have built infrastructures to support 2.3 -2.4 million starts. Based on the probability of 1.5 million starts, many of our clients will need to rationalize capacity by closing plants." Allen Associates is a leading executive search firm specializing in CEO search assignments for major building products producers in North America.

Certainly there may be regional pockets where housing starts are still strong. However, the general decline often has a negative overall impact on the economy due to the fact that housing starts can signal economic growth or, in this case, a slowing in the economy.

Many economic analysts believe America is entering a period of sustainable economic growth. Essentially this means American business is likely to continue experiencing moderate growth, but as the rapid rate of home starts has declined so has the overall rate of growth.

American business will likely be forced to develop and implement new strategies based on this revised economic climate. This may include reduced output, a smaller workforce and the further streamlining of their operations. If the analysis from Michael Allen is correct we could see, “…dramatic operational changes by June or July.”

The impact of a declined in housing starts does not necessarily indicate economic doom, but it is an indicator that the economy is either struggling of self-adjusting. In either case American business interests will be forced to take corrective action on behalf of their shareholders.