May272015

Poor job and wage growth holds back homebuilders

Homebuilding needs many new jobs with high pay to create demand for more housing units.

Mt-Everest-development

Homebuilding usually leads the economy out of recession. The Great Recession did not end with a building boom largely because of overbuilding during the housing bubble. A false price signal triggered excessive homebuilding, and it took five years to work off the inventories. The collapse of the housing bubble saw new home sales and construction fall to the lowest levels ever recorded — and those records go back to the 1960s.

To make matters worse, rather than experiencing a sudden drop and a “V” bottom leading to a new boom, new home sales flat-lined at record lows for seven straight years. This basically wiped out the homebuilding industry. A few years ago, I heard the Riverside County manager of KB Home quip, “I’m building 10% of the homes with 10% of the staff I had in 2006.” That’s no exaggeration.

Homebuilders demand comes from financially stable households with sufficient savings, good credit, and a desire to own a house. Unfortunately, over the last several years, household formation has been low, potential buyers lack savings, many have bad credit, and Millennials in particular are content to rent. That isn’t an environment conducive to explosive growth in homebuilding.

Rise in Home Building Suggests U.S. Economy Is Regaining Momentum

By DIONNE SEARCEYMAY 19, 2015caddyshack_turd_ihb

Home building across the nation accelerated in April, far exceeding expectations and suggesting that the economy was getting back on track after overall growth ground to a halt during the first quarter of the year.

Home construction last month rose 20.2 percent over March to a seasonally adjusted annual rate of 1.135 million, the highest number since 2007 and the biggest percentage jump in almost 24 years, the Commerce Department said on Tuesday.

The sunny report wiped out a particularly dismal showing in March and offered a measure of optimism for a housing market that has been slow to recover since the recession.

March’s reading was very low, and April’s reading is very high, so the headlines tout the huge resurgence in homebuilding and an improving economy. Unfortunately, it’s mostly bullshit.

“It’s a hell of a rebound in housing, there’s no denying it,” said Steven Ricchiuto, chief economist at Mizuho Securities. But “you have to keep it in perspective,” he added.

And what perspective is that?

Housing-Permits-Volatility

Housing starts and permits are extremely volatile numbers, so while the noise generates feel-good headlines, they don’t tell us much about the actual activity in the economy or the housing market.

Housing Starts & Permit Reality In This Economic Cycle

Logan Mohtashami, May 19, 2015

Today’s strong housing start numbers sparked  the same rabid fascination from pundits, as a dog jumping into a pool after a tennis ball. We first hear that this is the strongest report we have had in the past few years then the discussion degrades into that same sad song that tight lending is holding housing back.  The usual refrain of excuses for why housing “isn’t what it could be” is  given by people who don’t understand that main street America simply doesn’t have the income in this cycle to have a Nirvana-like recovery.

The responsible economist feels compelled to remind them how soft this recovery actually is.

Housing-Permits

Housing starts generally mirror permits, and they tell the same story.

2015-01-27-HOUSING

When you adjust for growth in the population, the picture looks even worse.

Housing-Permits-population-adjusted

When one considers the epic crash in new home sales and starts that occurred after the housing bubble burst, you might assume that by now we would see more velocity to the upside in total activity.  But this does not account  for the fact that we simply won’t have enough quality home buyers at this point in the economic cycle to have a real recovery. This is true for new home sales as well,  which are typically sold to the more well-to-do buyer and make up only 1/10th of all home sales in this cycle, usually 1/6th. Some of those buyers are finding better value in existing homes.

The equity buyer is largely absent because equity is absent. Millions of borrowers from the housing bubble 10 years ago are still underwater today, and millions more are just barely above water, lacking the equity for a move-up trade.

The problem with the builders is simple. New homes are very expensive because they’re big.  The metric of Median Income to Median Price homes has deviated too much for main street to afford the debt of a new home (or any home in most cases) if we are looking for strong housing demand recovery. This is the reason why new home sales trend have been soft in a 90% mortgage marketplace that is tilted to the more wealthy buyer once you adjust it to population growth.

Home-Sales-New-Growth

The story is about the same for resales.

Resales per 1000 Residents, Orange County, CA 1988-2012

Why would the first-time home buyer even look at a new home which is much more expensive than a existing home coming into the market. For a while builders had the advantage of low existing inventory but now more existing homes are coming into the market, increasing the competition for housing dollars.

I reported in 2012 that the same policies that served to eliminate distressed inventory from the MLS also served to revive homebuilding. Homebuilders provide must-sell inventory, so they need a vibrant resale market with a chronic lack of supply to sell into. A glut of foreclosures and weak demand is not a favorable set of circumstances for homebuilding.

At first low MLS inventory was a boon to homebuilders, but housing market manipulations give homebuilders false signals, so Orange County homebuilders oversupplied the market, and as it turned out, reflating the housing bubble hurts homebuilders, rather than helps them.

With that said, year over year growth in new homes sales, starts and permits are expected because previous numbers were so soft in 2014. But don’t let growth  from historic lows blind you to the fact that, thus far, this has been the weakest housing recovery in American history. It’s all about incomes and assets, and the lack there of, not tight lending.

There is no question that housing is getting better. Sales and prices are up, and they should continue to rise as the economy improves, assuming rising mortgage rates doesn’t spoil the party. Homebuilding is improving, though not as fast as in previous recoveries. While the glass isn’t half full yet, at least it is filling up, which is the hope everyone clings to.


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