By Michael Kraus, 09.08.2010 

File this under “questionable”: according to a report from Bloomberg.com today, U.S. homebuilders are resuming construction on stalled projects as banks cut their losses and unload unfinished developments.  Possibly the price of these developments is simply too low for builders to pass up, but I cannot conceive of how this is a good idea.

From the article:

“Builders are buying lots at less than half their original prices from lenders eager to move distressed construction loans off their books.  Developments are being resuscitated from Florida, California, and Las Vegas to Utah and the suburbs of Washington, D.C., according to Brad Hunter, chief economist for Metrostudy, a Houston-based housing researcher.

“This is a natural progression of the cycle,” Hunter said. “Projects fail, the price of the asset drops until it reaches a point where it’s profitable for someone else to pick it up and remarket it. They reposition the project and then what was formerly infeasible, is feasible.”

According to the article, homebuilders, battered by the recession, are attempting to increase profit margins by purchasing unfinished projects on the cheap.  The article says that the 12 largest homebuilders added a little less than 17,000 lots in the last two quarters.

The new construction is being tailored to the new needs of the post-bubble marketplace, with smaller average size and less ostentation.

Having said all that, this seems foolish to me.  We currently have a 12.5 month supply of homes on the market (a normal market has 6 months supply).  There are very few, if any, areas of the country where there is a true shortage of housing supply.  We have housing supply out the yang.  What we do not have is adequate demand to absorb this supply, nor are economic conditions encouraging household formation that would absorb any supply.  Home prices are falling in the wake of the expiration of the first time home buyer tax credit, setting up conditions that are prime for price declines.  Some analysts estimate as many as 4 million more foreclosures could result from another wave of price declines.  This would increase the housing supply even more.

The very last thing that we need is more homes.  We need people to buy the homes that are on the market right now.