The summertime uptick in single-family home construction is not good news for the U.S. economy. There is already a huge inventory of unsold homes, and now builders are building more, at more than half the pace of last summer.
Many of the new houses will go unsold for a year or two and could end up on bank balance sheets after the banks are forced to foreclose on the builders. To the extent that the homes are sold, they take buyers away from the existing-homes market, ensuring that prices for existing homes continue to decline. Some builders will end up selling the new homes they build this summer for no more than the price of materials and construction, taking a loss on their other costs. This kind of investment loss reduces the capacity of the economy to fund anything new in the future.
The former Treasury Secretary, Henry Paulson, based his whole economic recovery plan on the theory that housing prices could be made to stop falling by December 2008, leading to a recovery in the financial sector. That, in turn, was supposed to lead to a new period of easy credit that would help the economy rebuild. Some economists and policymakers are still promoting that strategy, even after experience tells us it is not as easy as it looks. I am sure we will continue to hear that a bottom in the housing market is just two or three months away. It is a message we have been hearing for more than a year. But that prediction is unlikely to come true as long as home builders keep building at such a rapid pace.