Yesterday’s housing starts number has pushed the mainstream press over the edge in declaring a housing recovery. I would argue that housing starts could maybe get over the low point of housing collapses of the last 50 years before we sound the all-clear, but it’s clear enough to me that, with Americans producing more people who need places to live every year, that you weren’t going to be able to get away with housing starts at roughly half the level of population growth for four years without the fever breaking at some point.

Housing has a self-correcting mechanism — it’s called population growth. Every year, the U.S. population increases by about 3 million, and the number of households increases by 1.1-1.3 million. New homes have to be built to meet demand from this segment.…

“How far can the rebound go with unemployment where it is? From our perspective, not much farther,” said economist Steve Blitz at ITG Investment Research, Inc. “The notion housing will now lead rather than reflect the overall economy is a bit too optimistic. The demographics lean against a national boom in home construction as does the limited availability of mortgage credit.”

Low household formation led to a lack of demand and catastrophically low housing starts in the crash years, and many were beginning to wonder if that was a permanent condition. With more people working, this has gradually improved, though it remains to be seen who will fill the first-time housing market. College graduates saddled with student debt? 800,000 housing starts annually is still way too low to keep up with population growth, so the construction industry would have to expand significantly if household formation can support it.

Indeed, Jan Hatzius of Goldman Sachs predicted that housing would add 0.25% to GDP this year and 0.5% next year, terming it a “normal expansion” rather than a boom. It’s basically expanding at the same modest rate as the rest of the economy.

One potential pitfall could be all the private loan modifications granted by the major servicers. These are modifications performed outside of HAMP, which have notoriously higher levels of default. Well over 40% of private mods granted since the third quarter of 2009 are now back in default. I’ve heard about some of these modifications leading to higher mortgage payments. These won’t all default in one fell swoop like everyone feared with rate recasts, but we could slowly see more and more decay as they tick off. Short sales have basically replaced foreclosures, and the private investors scooping up homes in serious default could set a floor under that side of the market and help prices. But that’s a bubble waiting to happen.

Meanwhile, banks swelled with mortgage exposure from the bubble years are sticking to less dangerous and more profitable refinances. As long as the mortgage businesses at the big banks keep losing money from write-downs and repurchases, the notion that you can have a parallel housing boom becomes dubious.

I’d be happy to believe that housing has returned and it will drag the economy along with it. Maybe consumers are coming back with a vengeance, and we can tell everyone welcome to the recovery. I think we need a bit more data.

David Dayen

David Dayen