Housing Starts Why It Won t Be Business As Usual
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Housing Starts: Why It Won't Be Business As Usual
Summary
The current economic pressure is partly due to an overly optimistic subprime market. With housing starts declining, consumer confidence has also taken a hit. The Conference Board reported that the consumer confidence index in March 2007 fell to 107.2, marking the lowest level since November and a drop more significant than anticipated by Wall Street.
Despite this, the Dow has shown resilience, and employment figures remain robust.
Article
The economic strain we're witnessing is being attributed by some to a subprime market that leaned more towards enthusiasm than realism. As housing starts decrease, consumer confidence follows. In March 2007, The Conference Board noted a drop in consumer confidence to 107.2, its lowest since November, and a decline greater than Wall Street's expectations.
There's a silver lining: the Dow remains steady amidst these developments, and labor statistics are strong.
In his March 28th, 2007 testimony to Congress, Federal Reserve Chairman Ben Bernanke expressed concern over subprime loan defaults. He stated, "Although the turmoil in the subprime mortgage market has created severe financial problems for many, the implications for the housing market remain unclear. The tightening of lending standards, a sensible market response, could reduce housing demand, while foreclosures will increase unsold home inventories."
Globally, the effects of the subprime lending bubble are being felt, with interest from the European Union and Australia in this economic indicator.
Bernanke noted that subprime loans represent about 10% of all mortgages. If banks struggle to profit from these, it could signal a slowdown in this lending sector, putting more pressure on housing starts and increasing the risk of loan defaults. This adds strain to what seemed a stable economy.
The slowdown in housing starts could significantly affect businesses. Michael Allen, CEO and founder of Allen Associates Executive Search, commented, "I receive about four or five weekly calls from CEOs concerned about declining housing starts. North American building products manufacturers have infrastructures supporting 2.3-2.4 million starts, but with expectations of only 1.5 million, our clients might need to rationalize capacity by closing plants." Allen Associates is a leading executive search firm for North American building products producers.
While some regions may still enjoy robust housing starts, the overall decline negatively impacts the economy. Housing starts are a signal of economic growth or, as in this case, a slowdown.
Many economic analysts believe the U.S. is nearing a period of sustainable economic growth. This suggests that American businesses may continue to experience moderate growth, but as the rapid pace of home starts declines, so does the overall growth rate.
American companies will likely need to adapt new strategies in this changing economic climate. This could mean reduced output, a smaller workforce, and more streamlined operations. If Michael Allen's analysis proves accurate, we might witness significant operational changes by June or July.
A decline in housing starts isn't necessarily a sign of economic doom, but it does suggest that the economy is either adjusting or facing challenges. In both scenarios, American businesses will need to take corrective action to satisfy their shareholders.
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