New home starts surpassed lowest pre-bubble low of last 45 years in early 2013

Bullishness is everywhere in real estate these days. People who follow the new construction market are touting the year-over-year increases with great exuberance. Homebuilding is certainly coming back, and as someone who spent most of my career working in the industry, I think that’s a good thing. However, the bullishness could use a little perspective. New home starts just surpassed the lowest low of the forty years prior to the collapse of the housing bubble. Further, the current pace of construction is still well below the stable average of the last five decades. It’s hardly a building boom. Also, the demand is entirely predicated on the restriction of MLS inventory and low interest rates — both market manipulations based on federal reserve and lender policy that could change at any time.

Pickup In February Starts Gives Bull Case On Housing A Boost

Steve Schaefer, Forbes Staff — 3/19/2013

The U.S. housing recovery has not been without its stumbles, but the generally positive trend continues and got fresh support Tuesday morning from a 0.8% uptick in February housing starts.

0.8%? Huge surge, right?

An annual rate of 917,000 starts came from both single- and multi-family activity and compares favorably with a pace of just 781,000 for all of 2012, a year when the rebound kicked into gear, and 609,000 in 2011. Permits, which rose to 946,000 on an annualized basis, were also above consensus.

“Starts have been volatile in recent months, with the trend clearly upward,” High Frequency Economics’ Jim O’Sullivan writes in a note Tuesday. The starts figure comes on the heels of a weaker reading from the National Association of Homebuilders monthly sentiment index Monday, which O’Sullivan attributed to the affects of “news reports around the time of the survey highlighting potential sequester effects.”

Perhaps it’s also a reflection of the fact that sales have been good but not as robust as they hoped.

Looking past the ebbs and flows that are inescapable in monthly figures, the broader trend in U.S. housing continues to improve. The bears though, have their reasons to question the underpinnings of the recovery.

For one thing, the Federal Reserve’s incredibly favorable monetary policy won’t last forever. While the key forces on the central bank’s policy-setting committee remain in favor of the status quo, a tightening of rates or a pullback on the Fed’s quantitative easing could slow the pace of the comeback in real estate.

Future housing markets will be very interest rate sensitive, so people have good reasons to be concerned about what happens when rates go up. This time around, once affordability limits are reached, prices will only rise with increasing wages because most of the affordability products used to inflate prices in the past were banned. With a rate dependent housing market, risks still linger.

Another matter is the massive influx of financial buyers in the space. Forbes’Morgan Brennan noted this week that the hottest markets in terms of price gains have been driven to a large degree by institutional investors scooping up foreclosed, bank-owned properties and converting them into rentals.

With no increases in owner-occupant demand, the recovery is totally built on the demand brought to the market by investors.

The concern is that problems crop up if those investors look to exit and a weak economy has not created matching demand from owner-occupants.

Institutions are most active in five states: Florida, Georgia, Arizona, Nevada and California. Interestingly the metro area that welcomed the most institutional activity in 2012 was Miami, Fla., with firms funding 30% of all sales. Single-family home prices for the Miami metro area rose about 11% in 2012 (including distressed homes), according to CoreLogic.

Wall Street Institutions Behind Home Price Surges In Markets Like Phoenix

Blackstone Group, leading the charge, has become the single-largest owner of U.S. homes, according to its chief Stephen Schwarzman,…

These firms shouldn’t begin liquidations for many more years, but it could happen sooner if they abandon this asset class. When they do, they will further contribute to cloud inventory (see: Must-sell shadow inventory has morphed into can’t-sell cloud inventory). It’s unlikely these hedge funds will liquidate in a fire sale. Most likely they will put the properties for sale at a price they want, and if they don’t sell it, they won’t care because they’ll keep holding it for positive cashflow. They will suspend their prices in the clouds just like the millions of underwater homeowners who are waiting to reach their exit points when the value covers the debt. The combination of both of these groups will limit appreciation for a very long time once those price levels are reached.

Homebuilding is coming back, and investors have reason to be bullish, but someone needs to point out to the bulls that although the market is somewhat stronger, it’s not a boom by any standard of past performance.

New homes are the only way to get a property today for leveraged buyers

Most of the deals currently on the MLS are going to buyers putting 25% or more down and waiving their appraisal contingencies. Anyone putting less than 25% down, and historically, that’s well over half the market, doesn’t have much chance on the MLS today. However, the homebuilders are happy to take these deals, as nearly a third of homebuilder sales are to FHA buyers putting down 3.5%.

To meet the needs to the many leveraged buyers looking for new homes, I’ve created the Irvine New Home Buyers Guide that provides pictures, floorplans, and cost of ownership information using a variety of financing scenarios for every home offered on the Irvine Ranch. If you are looking for a home, and you can’t get a deal on the MLS, take a look at the offerings of the Irvine Company. You might find the home you want there. You never know.