New Home Economy Works Slowly from the Bottom Upward
The story behind new home sales data out today, we believe, is that home builders collectively are managing seriously adverse economic conditions about as well as one can imagine in the limbo of a thus-far jobless recovery.
Look, for three years, the outspoken veteran home building company executives said the housing market was the worst they’d seen in their lifetimes. It could hardly come as a surprise to see unstimulated new-home demand revert to historical lows.
Remember, the absolute number of people who are out of a job is the highest it’s ever been, and the absolute number of homes in or headed for default is the highest it’s ever been as well. The multiplier effect of both of those trends hammers consumer spending, and bruised consumer spending translates into more pink slips.
So how could the new-homes number have eluded the economy’s wrecking ball once the U.S. government removed its tax support for purchases?
One of the more negative headlines, from blogger Calculated Risk, cites an all-time record low for June 2010, vs. a prior non-seasonally adjusted June of 1982.
Again, we’ll say that if you’ve got some of the sales associates who actually took deposits in May, June, or this month on new homes, you’d better do what you can to hang on to those sellers in the months ahead.
In the teeth of this adversity, small, medium-sized, and larger home building organizations have gotten yeoman’s work from their many-hat wearing associates.
Collectively, they’re turning inventory faster and they’ve ratcheted down both the absolute supply number (to 210K, down from 213K), and months’ supply, from 9.6 months to 7.6 months.
What’s more, analysts have observed the beginnings of a return to the market of first time buyers, as well as those in higher price points, indicating that contingency sales have begun to pan out for a number of folks in the new-home arena.
Even in the unlikely event that the unseasonally adjusted number of 1,000 new-home sales a day were to continue at its slow pace, and if the absolute supply number falls at the current level of 1.4% a month, we’ll be inside of six months’ supply by the end of 2010.
That’s hard work. And that sets up better times in 2011.
The very big question to think about, even if there’s little home builders can do about it, is job growth. A true housing recovery remains a ludicrous notion in the vacuum of a consumer-driven economic and jobs recovery, even if there are positives in home builders’ collective management of the supply of their wares.
Too, home builders can spark demand–like rubbing sticks together–if they can buy land cheap enough, which is not, for the most part, what they did in 2009 and the first part of this year.
Many of the finished lots purchased in the past 18 months were at rates that may reconcile to divisional operational overheads, but hardly pencil to a reset in the cost of homeownership that one may still reasonably expect after the dislocation and financial trauma of late 2008.
Strategically, just as home builders need–as a group–to learn more about who their home buyers are and what makes them tick, they’ve got to make strides on the buy-side of the equation as well.
When it comes to land buying, too often home builders get played for chumps. They are too easily played against one another, and too often they get tricked into not playing their own game.
Right now, for private home builders anyway, the ones to beat are not other home builders; the ones to beat are the banks. The banks hold (or rather, they’re mired in) assets, real and paper, for which they have no clue about how to get dollars. What they will get for the REO properties they’ve taken over from builders and developers are fines, headaches, taxes, lawsuits, lost money as entitlements expire, and grief.
A couple of home building companies–Lennar’s Rialto and Toll Brothers’ new Gibraltar unit–have set up to work with the FDIC at the bottom-dollar level to get value from holdings like this.
But, among banks who are still solvent, home builders may play at least a small role in their redemption from the hell of assets that can take on an evil life of their own if they’re not in the hands of someone who knows what to do with them.
Now that there’s beginning to be flashes of capital availability, home builders–particularly ones that can help banks work out of the myriad petty jams that some of their unintentionally acquired real estate holdings represent–may finally get their opportunity to buy low enough to sell something for a profit.
At least banks have staffed up their special services departments, and they’re said to be moving real estate deals to resolution, versus playing extend and pretend possum with the assets.
It figures home builders would have to take on yet even more risk as investors in recovery before they’ve got true visibility on its arrival. But that’s what it means when your industry sector is called the engine of the economy.
Somebody has to start spending money first, so hire a land expert who can get a bank out of a broken, messy, legally troublesome deal, and you’re on your way for dimes on a dollar.
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