US Housing Crisis: Is it Time to Buy?

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David Richards, in Barron’s, tells us that compared to the raging elephant of global economic boom, the American housing industry is nothing more than a bothersome gnat.

It is only 6% of the U.S. economy, he says. Of the worldwide economy…it is insignificant. We reported yesterday that U.S. housing represented more than 10% of the U.S. economy – a $1.5 trillion industry in an $11 trillion industry. The difference in the numbers probably comes from a difference in definition. Are REALTORS part of the housing industry? How about the people who make 2 x 4’s?

Yesterday, we noted that Weyerhaeuser (NYSE:WY) reported an 89% decline in earnings. Today, we follow up with the latest figures from the wall board industry. USG Corp. (NYSE:USG ) dominates sheetrock. It is a beautiful business; wall board is too bulky and too low-margin to entice foreign competitors. That’s why Warren Buffett bought a big stake in the company. But when building turns down in the United States, USG’s market disappears. It says net income is down 68%.

Meanwhile, the people who put up houses are going up in flames. It’s the “Bonfire of the Builders,” says BusinessWeek.

And here we pause…and gulp.

By the time BusinessWeek gets onto a story, it is usually too late to profit from it. If BW is announcing the bonfire of the builders, is it time to buy, perhaps?

On June 19, 2007, the U.S. Census Bureau released the residential construction report for May 2007. It showed that housing starts are down 24.2% year over year…permits are down 21.7% year over year and completions are down 19.3% year over year.

In addition, the Census Bureau report showed that permits are plunging, inventories are rising, and to look for a decline in construction jobs.

A cousin reports from Maryland that his business – installing septic systems – has fallen off. “I used to have 50 jobs backed up…now I’m going from one to the next, and happy to have work.”

How big will the problem be? The last crisis in the property market occurred in the early ‘90s – both in America and in Britain. In the United States, the Resolution Trust Company was set up to sort out about $300 billion in bad loans. But that was when America had an economy of only about $7 trillion. Today, U.S. GDP is closer to $11 trillion. Back then, consumers had only about half as much debt. And the housing boom of the ‘80s was nothing compared to that of the last 10 years. This blow-up is likely to produce a couple trillion dollars worth of casualties…and a long period of rest and rehabilitation for housing values.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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