Dec142015

Gullible homebuilders always believe overly optimistic forecasts

Homebuilders believe the feel-good nonsense printed in trade journals and industry media outlets and often rely on this information to make bad decisions.

“Freedom is the right to tell people what they do not want to hear.”

George Orwell

financial-mediaAs someone who worked in the homebuilding industry for over 20 years, I often drank housing kool-aid with my co-workers. Although I remained grounded enough to see the obvious housing bubble of the 00s, many of my co-workers refused to acknowledge it, sometimes with heated arguments.

The homebuilding industry, like many others, has it’s own trade journals and industry news aggregators that keep people informed on happenings that impact the everyone who makes a living from home construction. But rather than seeing their mission as one of providing accurate and actionable information, most of these industry news sources see their job to provide emotional therapy and good news to keep everyone’s spirits up. Why is that?

I suppose in any cyclical industry prone to brutally difficult downturns, the desire for good news and optimism is understandable; however, what astounds me is that the decision-makers who direct the flow of hundreds of millions of investment dollars consume this same bullshit, and worse yet, they rely on it to guide their decision making.

To err is human, but to err based on a selective reading of biased information and analysis is human, costly, and stupid.

Guest Blog: Beware the Wildly Optimistic Construction Forecast

Posted by Toby Morrison on Oct 20, 2015delusional1

In the construction industry (and most businesses in general), one of the most dangerous pitfalls you can make is falling into a trap of over-forecasting. This is a lesson that I had to learn myself as a sales manager and, in our business, over-forecasting has led to some serious problems over the last few years.

Think back to late 2013. Several industry analysts were calling for a dramatic spike in housing starts for 2014 (including one who believed we would reach an almost normalized level of 1.4M starts in 2014) and several manufacturers set unachievable targets as a result.

I_want_to_believeThis is exactly why homebuilders and others in the industry should read this blog. I said home sales would falter in 2014, and they did. Nobody would have relied on optimistic forecasts if they had come here for a dose of reality.

Unfortunately, by the time we got to July, it was apparent we would come nowhere near the forecast and almost every company I worked with was reporting that they had massive budget cuts, shifts were being cut at the plants and salespeople were extremely frustrated as they were looking at making substantially less money than the year before.

As we’re starting to see some positive figures in the new construction and remodeling markets lately, I’ve seen other pundits throwing out numbers that are just unrealistic.

I will go on record here and now to tell you that we will NOT hit 1.5M housing starts next year.

LOL! Now that’s a bold prediction… NOT. We barely hit 1 million single-family starts this year. There is no chance whatsoever of hitting 1.5M units next year — no chance.

housing starts

That gives you a sense of just how delusional these guys are. Someone out there looked at today’s conditions and the trend in place and somehow concluded building starts would increase 50% next year — in the face of rising interest rates.

Everyone in the industry is forecasting increasing sales. After all, that is the trend. I will go on the record now to tell you that they will ALL be wrong. I recently offered Clear proof that rising interest rates kills home sales. Since interest rates are very likely going to rise, new home construction and sales will likely decline next year, not increase.

I don’t foresee us getting near this figure until 2018 and, even then, I don’t think we’re going to quite reach 1.5M starts. I’m not being a downer as we still expect growth but, most folks who foresee a spike are banking heavily on the millennials.

To be sure, there is a lot of pent-up demand in the millennial sector. However, the options offered to the entry level group in terms of actual housing and financing are not plentiful enough to get us to 1.5M starts at the present time. Our model is currently predicting 1.185M starts in 2016 and is based upon a blend of indicators and what our 400+ researchers are seeing in the field. Here is our current starts forecast:

Housing_Starts_Forecast

He tries to make their forecast sound deeply thoughtful. It’s not. Their forecast is based on extrapolating the trend from the last few years into next year.

My prediction is far more thoughtful and interesting because I am predicting a departure from the trend due to changing conditions. That’s closer to true forecasting than extrapolating the trend.

Moreover, Millennials are doing things differently than Gen-X or the Boomers. Below is a chart from GALLUP based on a survey they did earlier this year. The net-net of this is that non-homeowners are pushing off home purchase farther into the future. Renting is not about a short transitional phase of growing up. Rather, it has become a stage of life. Getting married later, having kids later, this is all pushing out the timeline for household formation and home purchase.

 

Millennial_Home_Ownership

On the remodeling side, as of last quarter, we are at a new all-time high for remodeling activity according to our Residential Remodeling Index, the industry’s most reliable remodeling forecast. Consequently, we are expecting the growth rate to slow down a bit over the next several quarters. We’re still going to see growth but, we’ll be closer to 4% growth from 2015-16. See the chart below for our current forecast of remodeling activity.

 

Home_Remodeling_Forecast

Residential remodeling is headed to the moon, right? This is the infinite extrapolation of a short-term trend, the fatal mistake of every investor who loses money.

The bottom line is that you shouldn’t be fooled by the wildly optimistic. When forecasting, a conservative approach is always the better way to go.

Sure it is. When they’re wrong, they can be wrong as part of the group. There’s emotional and political cover in that milquetoast approach.

Moreover, it is a very good thing we aren’t seeing explosive growth as that is one of the primary contributors to the bubble bursting in the first place. Steady, sustained growth allows for proper planning and incremental opportunities.

Why do homebuilders, lenders and realtors believe such nonsense? Financially, it’s in their best interest to do so.humpty-dumpty_bailout

The current CEO of a major development company in Irvine convinced Wall Street investors to spend $650 million to buy the Great Park at the peak of the housing bubble. He gave speeches about how Orange County house prices would continue to rise at a rapid rate forever due to strong fundamentals. Where do you think he was getting this information?

After the housing bust exposed every fundamental assumption behind Orange County house prices were a delusional fabrication of wishful thinking promulgated through a compliant media, it would be logical to assume the decision makers at major homebuilders and developers would be ousted for their catastrophic lack of good judgment, but that’s not what happened. Most were left in charge, many were promoted, and some were bailed out.

When catastrophically bad judgment based on wishful thinking is rewarded, what do you think we will get more of in the future? Not clear thinking and rationality, I can assure you of that.

Media is partially to blame

The media outlets that provided the bad information that stoked the magical thinking of the housing bubble actually increased their delusional “happy talk” during the bust to keep people’s spirits up. baghdad_bobEmotional support is fine, but people who need that should seek out professional help, not supporting bullshit in the local news.

The poster child for Bubble-Era bullshit was David Lereah, formerly of the NAr, but the economists for the homebuilders were only slightly less wrong, and most of them are still busy putting out their erroneous forecasts designed to foster good feelings among the faithful.

Telling people what they want to hear

One fascinating aspect of watching Donald Trumps dominance of the Republican electorate has been the audacity of his lies.

Donald Trump is appealing to the worst in people. He tells them what they want to hear, and they eat it up. I don’t think he believes what he says, and I don’t think even his supporters believe what he says, but they so desperately want to hear it that they reward his bombastic buffoonery with raving support.

In the same way the financial media, particularly Builderonline.com, tells the homebuilding industry what they want to hear. These people read the feel-good stories without the slightest reflection on the veracity of what they read because they want to believe.

Who is to blame when it all proves a gigantic lie?

an-inconvenient-truth

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