Rock the Bottom
What’s good is bad, what’s bad is good, you’ll find out when you reach the top, you’re on the bottom. — Bob Dylan, Idiot Wind
And wouldn’t that be a good thing for home builders? Wachovia senior housing analyst Carl Reichardt, who’s been heeding his “Neighborhood Watch” network of 150 in-the-field sales managers at new-home communities in 20 markets for more than a decade now makes this call. “We now believe that field conditions saw their low ebb in early 2009.”
This is carefully worded, and it doesn’t touch home price stabilization with a 10-foot pole, as it shouldn’t. But field conditions at a low ebb earlier this year–i.e. the bottom–”by any other name would smell as sweet.”
The caveats?
Clearly, upward pressure on interest rates, insofar as that force messes with monthly payment seductions that–paired up with the U.S. government $8,000-first-time-home-buyer tax credit, historically low home price tags, and any further state inducements–have ignited sales in more than a few isolated markets and gotten many home building company past catatonic despair to a state more akin to mere agony.
“In May, we had our best-selling month since June of last year,” the CEO of one of the nation’s Top 10 home building companies told us this morning. He continued, “Yes, I’m very concerned about where interest rates have headed, but our first week of June was the best one-week sales period for more than two years.”
He’s not one to count on policy’s helping hand, but he’s heard tell that during the summer, several measures that would extend–and possibly even increase the amount–the effective term of the U.S. government’s tax credit program for first-time homeowners will make their way into committee as part of either another stimulus package or as separate initiatives.
Typically, housing recoveries show up first in stocks, then home sales volumes, followed down the road by price stability. It’s widely believed now that stocks may need to re-test their lows before volume builds up support for a sustainable rally. So, if the typical recovery plays out, it’s still premature to say it’s underway.
A bottom, however, is a different thing, and this bottom may have–how should one say it?–legs.
It’s an important inflection point Reichardt has called. Field conditions hitting their low ebb earlier this year doesn’t mean there won’t continue to be a lengthening casualty list from the ranks of home building companies who can’t or don’t make it. Those companies’ ill-advised or ill-fated deals with lenders will continue to play out as the financial debacle unwinds.
How much capacity home building needs at the end of the day is still in question. How many home buyers the credit crisis has pent up vs. how many home buyers may have been borrowed from the future by easy money policy is still a healthy debate. True demand is still elusive–it’s somewhere between played-out and pent up.
However, we expect our coverage in the months ahead to take a decidedly different tack as well. Just as back in the Resolution Trust Corp. days many entrepreneurs got their start and a few power players consolidated their empires, we believe that by the end of the summer, there’ll be a stream of start-ups to offset the shut-downs. We’re already getting word of a few “come-back kids” who’ll raise an eyebrow or two once they officially hang up their shingle.
Bottom line is “affordability” for home buyers hasn’t been where it is now since at least 1993. It may need to get even better to seriously move the needle for home builders. So land, and all the other costs of labor and materials, had better get to be pretty dirt cheap.
What’s good for home builders may be bad from the ones they buy their raw materials from. But then the cycle will have begun again.
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