Wednesday, 31 October 2007 05:00

Quick note on increase in construction spending: not necessarily good economic news

Listening to CNBC this morning, I heard that residential construction spending has just increased, bucking the consensus and being lauded as good news. The home builders, who are the largest contributors to this index, are buried in debt and need to build in order to monetize the land they cannot sell for positive cash flow. This is their business, and they must build in order to try to make money.  I know it sounds counterintuitive to build houses when you currently have more houses than you can possibly sell, but from their perspective land is worth more with a finished house on it then it is in a raw condition. This is in their individual selfish interests. The problem is that adding more houses is negative for the homebuilding industry in general, negative for the economy since it adds supply to an oversupplied market that has slackening demand, and it steals wealth from homeowners by dropping the values of homes as supply increases further.

I am a contrarian along these lines, as in my viewpoints on share buybacks.

Last modified on Wednesday, 31 October 2007 05:00