Posted by Jonathan J. Miller -Saturday, January 22, 2011, 12:01 AM
Last weekend there was a widely talked about article in the Sunday NYT called “Why Your Next Place May Cost More” that covered the recent plunge in building permits.
The experts quoted in the NYT article all seemed to exude an alarmist tone that prices were going to jump next year because no significant new product was being built but they completely disregarded product that has not been sold yet or the limited financing available to consumers to spur demand. In other words, permits dropped because demand is limited. Its not some sort of random event. If there was a shortage in a year as suggested by the experts, then permits would explode starting right now.
Here’s the theme of the NYT piece.
“But starting in 2012, after most or all the new projects that were stalled or delayed have finally sold out, the supply of new apartments will take a decided dip, and prices for all apartments could start to rise significantly again.”
Here are a few of the quotes in the piece.
“We tend to go through these cycles where, when you finally come out of a recession, there’s a shortage of inventory,” said Gregory J. Heym, the chief economist for Halstead Property and Brown Harris Stevens. “You usually expect the slowdown to come over a couple years, but this was like slamming on the brakes. So to start up again may take awhile.”
Actually its just the opposite. For example, it took 7 years to unwind the inventory in the 1989 housing crash until 1996. Inventory was bloated in 1992 through 1995 – prices were soft and there was very limited new development. The recession ended 5 years earlier in 1991. After the 2001 recession inventory increased for another 2 years and only peaked because of the onset of the biggest global credit bubble in history.
Gary Barnett, the president of Extell Development and one of the few developers who continued building through the downturn, said the lack of inventory was more pronounced now than in previous recessions. “In the early 1990s,” he said, “there was a big overhang of things that had been built in the late ’80s, but when things stopped this time, it just fell off a cliff.”
The number of building permits “didn’t go from 10,000 to 6,000,” he added, “it went from 10,000 to nothing. So we don’t have the overhang and no big inventory to work through. That’s why the market recovered much more quickly than people expected.”
Not exactly. Permits fell below 500 in 1992 (373) and 1994 (428) after the 1990-1991 recession and didn’t return to “normal” levels for 5 more years.
However housing prices didn’t rise for another 8 years after the end of the 1990-91 recession.
While I agree its a very dramatic drop in permits but permits don’t necessarily correlate with what gets built. I also don’t see us in this predicament forever. Actually the permit filing drop is the much needed visual for the credit crunch. Its not a sign of shortage, its a sign of surplus.
Why file an application for a building permit if commercial lenders aren’t financing new condo development in any meaningful numbers? Why? Because lenders see shadow inventory (they are holding it); they see high unemployment (even though NYC is improving); they see individual buyers unable to get financing in new development in large numbers to create the demand needed to absorb yet new condo construction. As I said before – if it were so obvious that prices would spike in 12 months and there would be a chronic housing shortage of new development, don’t you think permits would explode right now?
Here’s a contrarian piece that was provided by the NY Observer by Matt Chaban: We’re Running Out of Apartments! (Well, Maybe Not)
If commercial banks aren’t willing to lend now, and it takes at least 2.5 years to get a project online, even if current unemployment, shadow inventory and the ongoing credit crunch were ignored, then it would be 2014 before we see meaningful new construction volume.
Or am I using the wrong equation? Help me understand, please.