Is Home Building Nearing a Bottom?

An economist says Tuesday's weak housing report may signal the industry is approaching its nadir.

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Home building is "probably getting very close to a bottom," says Brian Wesbury, chief economist at First Trust Advisors.

The optimistic outlook came in a report issued Tuesday after the government announced that May housing starts were down about 3 percent from April and 32 percent from a year earlier. May's figures put housing starts at their lowest level since 1991.

Why might this signal a bottom, Brian?

The number of homes under construction is down 27.8 percent versus last year, the largest 12-month decline since 1980. Given this decline and the drop the year before, the level of housing construction is low enough that the industry can work off excess inventories—a necessary step toward a sustainable recovery. With housing starts near a bottom on a nationwide basis, there are many communities across the country where home building is already rebounding.

Still, that doesn't mean Wesbury expects prices to rebound soon. "We continue to expect home prices to drop on a nationwide average basis through mid-2009, as the market continues to work off excess inventories," he said in the report.