Behind this Week’s Housing Headlines–Big Home Builders Cobble Year on Year Gains
Alas, negative real estate headlines on housing starts and permits. They follow the prior day’s downer, the NAHB/Wells Fargo Housing Market Index, which reported a plunge in home builder sentiment. So what else is new? Is it news that the press and analysts mostly don’t get it?
Who said, “We don’t need a weatherman to tell which way the wind blows?”
There’s no time like now to get behind the headlines, and understand what is really going on in home building’s trenches.
As the saying goes, the devil here is in the decoys.
These reports reflect anxiety and capture starts and permits data higher volume home builders already lived through and put behind them. There’s not a home builder still in business who didn’t expect what’s going on now to occur, practically from the moment last November Congress passed legislation that extended and expanded home buyer tax credits.
Starting late last year, then, home builders prepared for a crescendo of demand for new homes between February and April, increased their starts, including spec counts accordingly, to accommodate the bulge in buyers that would come in to beat the April 30 deadline. Then they focused on completions, deliveries, settlements, which is what they’re feverishly doing now to comply with the June 30th settlement D-Day.
It’s what they do. Fact is, a multi-billion dollar stimulus program set up to pull home buyers into the arena from the sidelines did just that, and now it’s time to stop it, pay for it, and move on.
Many of the analysts, and most of the media are reading “new information and insight” and “disappointment” into the reports released in the past couple of days, but we believe the players in the industry itself are far out ahead of the headlines.
Two anecdotal remarks we heard last week at the Pacific Coast Builders Conference offer what we’d regard to be more reliable indicators of real-time home builder sentiment than the just-reported NAHB index, and today’s Commerce department report on housing starts and permits.
First, though, let’s recall two critical factors about the HMI. One, is that whether the index reading is a 22 or a 17 is only marginally significant, and more so directionally than in the score itself. Since any score below a 50 means that more home builders have a negative outlook than a positive one about the present and future, the current levels reflect that more than four out of five of the NAHB survey respondents are not sanguine about the demand environment for what they do for a living. A few points this way or that don’t amount to a whole lot of difference.
The other key consideration to remember with respect to the HMI is the distortive impact of the survey sample base itself. By far, the greatest number of home builders in the sample are smaller-sized companies. The sentiment expressed in the NAHB data is sentiment consistent with the particular travails of small companies–including their struggle to access construction financing, acquisition, and development loans, etc.
What we’ve been observing for months is that larger, especially national public home building companies, have buffered themselves from the month to month ebb and flow of confidence and capital access. They have set themselves up to make marketshare gains while their smaller, less well-capitalized brethren struggle to keep their lights on as they try to extract vertical construction financing from a hostile lending environment.
So when those folks from mostly smaller home building firms were answering the NAHB survey questions about traffic and sales outlook for the months ahead amidst a radio silent May survey period, it’s a wonder to us their confidence only slipped 30% from where it had been. It’s a wonder also that starts and permits are only down 17 and 10 or so percentage points respectively on a sequential basis, versus dropping off a cliff month on month.
Now, here are the two remarks we think help take us behind this week’s grim headlines, flying in the face of theories that the headlines have housing trundling toward a “double-dip.”
One remark is that builders’ terms for the current market range from “fragile” to “wobbly” to “choppy.” The “dip,” by the way, is the same dip that housing confronted starting in 2007, with a housing stimulus package wedged in to help stoke demand and take some of the excess supply out of the market.
The three things now going for new home builders is that most of that excess supply (of new homes) is gone out of the market, homes are comparatively more affordable than they’ve been for more than a generation, and interest rates are largely supportive, especially on the monthly payment front.
Remove a cast from a broken leg, and what to you get? Fragile, wobbly, choppy, which is what home builders are describing in their markets. What happens next depends on whether the economy can keep making headway on the job creation front, because even if it’s lower-paying jobs that the economy adds, at least that provides a psychological lift to those who begin to believe they’ve weathered the worst and might be ready to buy a home.
The second anecdote we heard that we believe is more telling than the data releases of the past two days is this. A Phoenix area home building executive said to us: “We were very, very quiet right through May, but the first week of June, we saw an immediate pick-up in traffic to where it had been before the end of April.”
Factor in the fall-off in both sentiment and starts and permits post-tax credit expiration, and you’re still looking at significant year-on-year improvements from 2009, which is all most larger volume home builders are trying to achieve–a ballpark 10% improvement on last year’s numbers.
That’s still not good enough to keep all the home building capacity that’s out there in business. So more players will go away, and that will probably have more to do with their inability to pry capital out out of lenders than it has to do with the end of Federal home buyer tax credit programs.
Ignore yesterday’s and today’s headlines. Stay busy making tomorrow’s.
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