Housing Sentiment, Starts & Permits: We’ll Take Sideways for Now
All of confidence is divided into three parts: Consumer confidence, CEO confidence, and home builder confidence.
We talked with some home building executives this week. A fall in home builder confidence–reported Tuesday by the NAHB–is not a surprise. A public home builder CEO told us, after several months of surge in sales on the margin at the entry level, “There’s not much good to say about sales out there right now. But we’re about to do some things.” New product. New deals. More focus on monthly payments than ever.
Another home builder friend–from the private sector–describes the plight of many private companies ever eloquently:
“There’s no money to be borrowed to finance a dirt deal and certainly no money to finance the improvement of any dirt one might own.
- Banks are trying to sell what they have foreclosed on at 70% of what they loaned
- Investors are willing to pay 30% (or less).
- Appraisers are setting values for raw ground based upon absorption levels using today’s sales volume and not accounting for the fact that if we don’t see a better market in future years then all hope is lost and the end is near.
- As an example a recent Metro Study report set vacant developed lot absorption at 10 years in Charlotte. They based their numbers on annualized permit numbers of 4,800 permits. That’s the pace estimated for end 2009. Their math is correct and the methodology is too. It deals with current state only. We all know that in a market with more than 1.4M people that at some point there will be more new homes constructed than 4,800. When the lot pickups increase supply will dwindle and builders will need lots.
We know that the government poured printed cash money into the coffers of the banks, but very little of this cash money is making its way into the real economy because the banks own so much real estate that has lost value, the mountain of cash is still not sufficient. So there’s printed currency, but there’s very tight credit both for consumers and companies.
So more small companies will disappear, and the nation’s most significant employment source for the past decade–small to medium sized companies–will continue to weaken in numbers and strength.
Strategic planning, therefore, for private home building enterprises consists of don’t make mistakes yesterday, do something fast now, and it better be internally funded and very smart.
The latest starts and permits numbers reflect stimulus’ double-edge: less urgency to buy, but more urgency to speculatively build in anticipation of another hoped-for mini-frenzy in February and March. The thing to say about starts and permits moving sideways consistent with expectations is that, if this were last year, that would have been tremendous news.
Thing about sideways is that it’s still going to eat home building companies alive. The best leading indicator for new residential investment momentum will be greater demand for hourly wage earners, which is showing signs of flickering life. After that, it’s that switch-flip from reducing inventories to growing them.
Then we’ll see consumer confidence resurface, and all the brilliant survivors around then will have demand for their newly designed housing products engineered through entirely new manufacturing and operational processes.
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