How Will Builders React To ‘Glutted’ Market?
One more topic from readers over the weekend. “Will the condo crash be worse than the SFH crash? Can you really separate the two?”
Another asked, “What pressures do developers have to keep building in the face of a glutted market?”
To which one replied, “I had dinner a week ago with a 75 year old condo developer in Florida. This guy is a survivor and has seen it all. He put his latest hotel/retail/condo project on hold because of oversupply. But, what is interesting is the comment he made about the construction pipeline. Once you start getting airborne with the project you just can’t stop. You have to finish it to completion because if you do not you will have weather-related structural damage, angry pre-sale clients, an inability to get fixed rate financing and a host of other problems.”
And another said, “Mark Hulbert is confused about whether now is the time to buy housing stocks.” “Daniel Seiver recently wrote: ‘The end of the housing boom is now obvious to almost everyone..but we do not believe that the downtrend in housing stocks is over yet. The air will continue to come out of the housing bubble ever so slowly, and all through 2006. It will take years to unwind the overinvestment and overspeculation in housing.’”
“Seiver in his model portfolio currently is recommending two short sales from the housing industry: KB Home and Lennar.”
A reader posts, “We are seeing more days when the HB stock charts move consistently with what I term the administration of PPT methadone. What you see is a steep plunge at the open caught by a safety net which limits the loss for the day to less than 2%. This makes the crash gradual and unworthy of a news item in the WSJ.”
Speaking of the Wall Street Journal. “Home builders broke ground at the fastest pace in more than three decades last month, as unusually warm weather trumped signs of a weakening market. ‘The January number is an aberration that doesn’t mean anything,’ said (economist) Patrick Newport. ‘We’re going to see a big drop in February and then a gradual slowing for the rest of the year.’”
“Steve Gerber, vice president of production at a luxury-condominium builder in Bethesda, Md., said his firm is having a harder time selling units now. The company is into its third month of sales for a 14-unit condo complex in the Columbia Heights neighborhood of Washington, D.C. ‘A year and a half ago, we had a 12-unit condo building sell out in four hours,’ Mr. Gerber said. ‘Those days are over.’”
Sorry to repeat a post, but it seems on topic: How about a great deal on some HB stock shares? (They’re not making any more land, ya know!)
http://tinyurl.com/s4j49
Thanks, Barrons…
From all your friends in the HB Shortsellers Association (or “Bubblers shooting gallery” as friends call it)
‘One more topic from readers over the weekend. “Will the condo crash be worse than the SFH crash? Can you really separate the two?”’
1) The condo crash will be worse. In a down market, condos behave more like pork bellies than SFRs, as many identical units on the market clear up any potential doubt in buyers’ minds about which is the best deal (which would be the lowest priced among the identical units). The exception will be in tract developments of near-identical McMansions, which will also behave like pork bellies in a downturn, but have much further to fall.
2) No, you cannot separate the two, since condos and SFRs are consumption substitutes. If condo prices fall by 50% and SFRs stay at the same price, most folks in the market will figure out a way to adapt to condo livin’.
Good post.
Agree. Condos and townhouses are more infested with flippers, and they’ve become more outrageously overpriced than SFHs in many areas. Furthermore, there is much more inventory yet in the pipeline. The great condo bail-out will bring about a severe correction.
Many condo projects have been built in anticipation of swarms of retiring boomers migrating from the northeast to places like Florida. However, now that the boom is busting in places like MA, fewer will be able to sell their homes for prices that will allow them to purchase $600K condos and also fund their retirements.
I expect that as banks tighten and secondary-market MBS investors turn gunshy, that loans for condos will be harder to obtain, and probably on less favorable terms.
I also agree that McMansions will suffer more than other, more practical detached homes. These are not being purchased by multi-millionaires; they’re being bought by regular, middle-class folks who are committing financial suicide in an attempt to impress their friends and neighbors. As people come to understand the true carrying cost and impracticality of these monster homes, they will become very difficult to sell.
Don’t forget that the pension bubble is crashing contemporaneously with the housing bubble. Once all these boomers figure out that the pension fund is empty, and that the company dumped the plan’s liability on the PBGC, it is going to be hard to find swarms of millionaires looking for a nice LaJolla condo to settle down to in retirement.
Based on past results you are correct. In 1992, down in Palm Beach County I bought a Townhouse for about one third off at auction. The condo buildings went for close to 50% off in the project and the SFH went for about 25% off.
Of course, the over building and bubble in South Flori…duh is larger this time so the auction numbers next year will be different.
Chris
You are right. A friend of mine planned to cash out of his SFR which had gone up 200% and move into one of the new condo’s downtown (San Diego), but the condo’s had gotten so expensive that he nixed that idea. If condo’s were to crash, people like him would rethink that plan. Thus I agree that they are related.
Recall the St. Joe CEO statement recently about how many developers are ‘prisoners’ of land bought at retail prices using debt. That is exactly the situation most of the public homebuilders are in. They can’t afford to sit on their $billions of inventory, especially since they have almost no cash.
And those land options and inventory was very recently used as a bullish argument to hold these dogs! LOL
Ben, if all these HB’s really don’t generate any free cash flow, wouldn’t they have long ago stopped repurchasing shares?
its all BS. remember, all these big companies issue stock options, which dilute their total shares. they buy shares back to stop this dilution of ‘total shares outstanding.’ they only tell the public about one half of this equation.
There was an article about this in Business Week a couple weeks ago.
Dragged my wife to several of the hundreds of open houses this weeekend. We went to several high end home builder open houses. At every one of them we were the first and only visitors. We also noticed that many of the smaller “custom” local builders had a $hit load of spec houses finished and unsold. National HB have the ability to carry this invetory for a while, however, the local guy with 7 $1,000,000 spec homes can only hold on for so long before he starts hurting.
The easier it is to get financing for something, the harder it will crash, because easy “individual” financing is what’s fueling this. That means that–in general–condos will crash first, followed by SFH, followed by land OUTSIDE of developments.
However, there are some neighborhoods (i.e., Polk County florida) where entire communites of SFH are owned by “investors” who are renting the houses out. These may bust just like condos.
Housing units that have a large percentage that are not owner-occupied, like Condos, will have a higher potential to crash. This is what happened in CA in the early 90s.
Slowdowns don’t really matter in Florida. Everybody’s loaded.
http://www.miami.com/mld/miamiherald/13906073.htm
Fire in the hole! (ducks)
Stephanie
I think condos in the CA Bay Area will crash harder simply because they are more unrealistically high. The builders on nice townhouses have started to drop their prices already. Why spend $500k on a 900 sq foot condo (converted cheaply from cheap 1980s apartemnts) when you can get a 1400 square foot new townhouse across the way?
Why spend $650k on a 1400 sq foot condo when across the way you can get a 2000 sqare foot new townhouse?
Condos, by being “affordable”, I think got bid up higher than houses in this area.
Yes, I’m shocked to see condos prices in the Bay Area. There are many condos that are priced higher than SFH’s. No thanks.
Same thing happened in Santa Barbara about 5 years ago when SFR’s became too “out of reach” by the majority of buyers.
Once the condo alternative became VOGUE… speculators jumped on those too- knowing that those that still wanted to own a piece of SB would only do so by purchasing CONDOS.
Needless to say, condo prices escalated at even a faster pace than SFR’s… but,
NOW you see alot of condo glut inventory coming on the market due to BUBBLE TALK. Smart investors continue to JUMP SHIP now before it really TANKS.
I’m in the Bay Area, too, and agree that the condo/townhouse prices are beyond ridiculous. I don’t know how people sleep at night knowing that they are being held hostage by the mortgages on these crackerjack boxes.
Check this out: Remember when townhouses were 2 stories only? Well, in the Dublin Ranch Village there are 3 story townhouses! I took a builder friend with me on a tour about a year and a half ago, and he just shook his head. He said that most of the sq footage was taken up the the stairs and the materials looked substandard, with the exception of the granite countertops. The rooms are laid out so that you really couldn’t get a decent amount of furniture in ANY of the rooms. Asking prices are in the $600k-700k range….they used to be $300k range (per a PeopleSoft friend who bought one when they first started the project).
BayQT~
Ben,
You gotta put some kind of warning on posts that contain “PPT” speculation so that those of us that are sick of it and too disgusted to even bother wasting our time don’t have to keep reading. Honestly, it’s like “Bush hate” or “get out of Iraq now” or those kinds of things. I just stop reading and I’m pretty sure I’m not alone. And since I’m ranting, how about a plea for some self control in replies, by that I mean how many satirical “…but housing never goes down” posts do we need to wade through?
Well, Bush does suck and it’s worth repeating.
True, but perhaps, better suited for another blog on that subject.
He’s worth mentioning by virtue of the fact that BrainDeadBush is complicit in this insane liquidity bubble.
I don’t credit him with the math skills to even be ‘complicit’. Oblivious maybe.
The guy means well, but he doesn’t have two brain cells to rub together.
Yes, Bush blows and let’s get out of Iraq now.
Robert, I recommend the Evelyn Wood course.
somebody put rocks in your cheerios this morning??? We’re here, having a good time, talking bubbles!
Sorry, Robert. Although you aren’t convinced that the PPT exists and active, the professionals in the business are many who believe it. I hope you have done your homework before rejecting any consideration of market manipulation. Clearly the best source of information on the subject, IMHO, is at :
http://www.sprott.com/pdf/TheVisibleHand.pdf
If you have read it and aren’t convinced, then fine. I respect your opinion on that. But if you haven’t read it, then I fear you just don’t understand the situation.
I don’t doubt that there is - or was - a plunge protection team, set up to intervene and restore confidence in the event of potentially devastating market crashes. However, it smacks of conspiracy theory to assume that every time a home builder stock drops and then recovers, that it is due to nefarious government intervention. I seriously doubt that the federal government cares what Toll Brother’s stock is selling for on any given day. A more likely scenario is that bargain hunters are buying on dips, technical analysis guys are jumping at “buy” signals real or imagined, and/or that hedge funds are buying and selling large blocks.
The article that you cite claims that the PPT periodically buys index futures in order to prop up the market in general — a believable claim. I doubt they’re day-trading TOL.
Dawnal, I am afraid that some posters here are not willing to actually look into the PPT theory at any level of depth, preferring the easy job of rejecting the idea out of hand to the hard job of weighing the evidence. Are all conspiracy theories wrong, by definition? Good thing it was Bernstein and Woodward who were working at the Washington Post back in 1972, and not Robert Cote.
How about if we agree to avoid labelling anyone’s opinions as absurd, without bothering to present any evidence whatever?
Bring on the inventory -
http://www.signonsandiego.com/news/metro/20060220-9999-1m20concrete.html
Meep, meep, meep, meep…
last up, first down
any comments on UK reporting an uptick in prices for jan ?
where’s the crash ? seems we’re coming down later ,but harder in USA
What is PPT?
PPT is the Plunge Protection Team. Traders speak of it all the time. Here is the best source of information that I know of on the subject.
http://www.sprott.com/pdf/TheVisibleHand.pdf
Here’s the latest on the situation in Las Vegas:
http://www.reviewjournal.com/lvrj_home/2006/Feb-19-Sun-2006/business/5872253.html
Wow. An excellent example of groupthink. 10% appreciation is not normal, it is a hot market. This person’s perspective has been so slanted by an aberrant market that they have lost touch with reality.
Straight up, man…
Stephanie
Normal?!?! Yes asset prices increase 10% per year forever. LMAO!
Toll came out last Fall and warned. Since then their stock has fallen nearly 50%. Most of the big builders, however, have been mute during this period or otherwise affirmed or raised guidance. KBH warned the other day and there is still a goo $50 to be made to the downside. Such is the case with most of them. The investors in these stocks are seemingly in complete denial.
I’ve followed the builders these last several years and to listen to a conference call, you’d think they had invented the cure for cancer.
DR Horton, for instance plans to “Wal-Martize” the industry. They are confident if not arrogant in their tone, and they dimiss the notion that ANYTHING will slow them down. The magic formula, of course, is the highly vaunted “Market Share” weapon. As I understand it, as smaller and weaker competitors become less able to compete, Horton and other large public builders will use their size and vast resources to absorb those markets by whatever means. They can prove that this is so, just look at their track record. And of course, the last 5 years eclipsed anything they’ve ever accomplished, due of course to a surge in demographics and increased momentum in “Market Share”. In essence, people don’t “buy” their homes, people are “sold” their homes and the big builders are Master Salesmen armed with “MARKET SHARE”.
Sheeeesh! It seems like they really believe all this, and have mistaken a fantastic bull market for brains. I don’t know how or why people will buy their new homes over other new homes that are sitting on the market stagnant. It would seem demand has pretty darn well been filled, and now with the tightening of lending standards, the door closing or closed on yet another round of refi, people are out of money.
With the big price slashes the big builders have been promoting, eventhough they’ll likely still make good profits, I don’t see how they can capture the same earnings as last year and yet most of them are GUIDING HIGHER!
It is a mind boggling thing, and I’d be interested in hearing anyone else’s ideas on the “market share” thing specifically as it applies to the big builders, and what if any merit it has.
Now is finally the time to short the big builders. It is the incredible earnings growth momentum that got them here, and it will be its loss that will bring them down. IMO, they don’t have to go bankrupt to be a great short.
THESE MORONS ARE ALL DRINKING THE SAME KOOL-AID. SHORT TO YOUR HEART’S CONTENT!
I am short a big builder myself but the market share thing is important to discern. you said:
In essence, people don’t “buy” their homes, people are “sold” their homes and the big builders are Master Salesmen armed with “MARKET SHARE”.
Well. People are “sold” Coca Cola. And all the P&G brands like Tide, Iams and Swiffer. So? Are you saying there’s no value in that? A good marketing & sales organisation is a good advantage for any company. If you’ve ever operated any business you should know this.
On the market share captured by big builders, much of their power has come from marketing but in the future it will come from financing. See, all these small builders now are going to eat dirt. ch.11, hastalavista. Big builders will survive, even if they are in ch.11 they’ll re-emerge. This is a trend in our society, for big companies to keep growing.
Having said all the above I said short the big builder because i think this will all be a huge disaster in any case, though I still do not understand how bad things canget for the builders.
Maybe my point was not clear. I meant that the big builders seem to think they control the buying, as if Depression era interest rates, and 100 new mortgage products, and NINA (no income no assets) had nothing to do with their good fortune.
Once the demand dries up, for a variety of reasons, then they will no longer be beating their numbers but going down hill, IMO. BTW, people can buy many, many cans of Coca Cola, blow the money and still be fine. On a personal basis, buying the wrong house is a lifestyle killer.
The market share argument sounds good but there is no escape from the fact that there are too many houses for sale. The inventory numbers in some markets has rocketed up. In the face of this glut, the HBs are building at a strong pace. Supply and demand is an immutable law. It works every time. When the supply goes up faster than the demand increases, prices go down. The imbalance between supply and demand in the housing market promises to be spectacular. Soaring inventory on one hand, and shrinking demand on the other. Notice that sales figures are soft almost everywhere. One reason is that speculators have switched sides. They aren’t buying anything these days and are beginning to sell what they have. The epitome of the double whammy. And interest rates are higher now than last year. And sub-prime lenders are finding it more difficult to sell the paper they generate. Regulators are threatening to tighten up on mortgage lending.
I don’t see “market share” overpowering this vast array of impediments.
Well, they plan to be big! Really BIG!
They may lose money on a per house basis going forward, but I’m sure they will make up for it in volume if they are big enough.
Market share does not mean the same thing in the Housing market as it does in a comsumables market. A consumer may purchase a litre of Cola Coca every day to drink with this Burger Bling. And he may make his purchases at Crack in the Box because the saturation branding campaign convinced him that Crack was the best.
But no one buys a house because of the builder’s brand. And no one buys a new house every day, or week, or year (well, not usually). There is no market for used hamburgers. Without a consumable product that generates repeat sales, and the absence of a strong “used” market, you can’t really claim to have meaningful market share, because you don’t have repeat customers. Worthwhile market share means that you have reliable consumers who prefer your brand and purchase from you regularly.
I’m not so sure they’ll be hurting any time soon. They are making huge profits since their cost to build has not risen as fast as the sale prices and even if house prices drop 50% they won’t be losing money on the deals.
They are booking big profits, not necessarily making them. Whenever they have take a deposit they book earnings. Recently one of the big builders reported 33% cancellations when it came time for the buyers to step up.
All the builders borrow money in steps to fund their operations. When they get a deposit/offer on a home they go to the bank and borroe money, when they close the deal they get paid the remainder. If they are borrowing money and not closing the deal they are simply building homes on spec with borrowed money, same as the uberflippers (except they have better margins).
The only way for them to sustain growth at this point is to build cheaper homes that will sell and start merging with each other. You will shortly see big M&A activity among the builders along with 1,200sqft homes for less than $200k. They will do all they can to keep as many skilled workers as they can busy so they can prosper from the next bubble.
The new name of the game will be growth through aquisition and solvancy until the next bubble.
“Genius is a rising market” - Galbraith
Brookfield Homes is an interesting target. It’s still trading very close to peak at ridiculous price to book. 100% exposure to bubble areas (CA and DC area). Not optionable so have to short.
One of my favorite analysts is bullish on HBs long term but still concedes 50% down for average HBs and 70% for the most overvalued like TOL.
D R Horton has responded. 25% and more off. See
Wally:
Depends on what you mean by “hurting”. I’m speaking more of the stocks than the companies. Earnings growth momentum is what got the stocks to these heights. The question is not that they’ll continue to make profit, the questions is, will the earnings momentum continue. On their side, the multiples have remained historically in tact with their relationship to EPS. No 100 Pe’s or anything like that.
Toll Bros said they’d have a 10% decline in sales this year and the stock has fallen nearly 50%! See what I mean. The HBs have all said this is different now, they don’t make the mistakes like they used to, and do not build excessive inventories which they could be stuck with. The housing bulls have argued for the last 4 years or so that RE is NO LONGER CYCLICAL. (bulls also argue that these stocks should be rewarded a much higher valuation PE wise, and yet Wall Street has not done so. WHY? IMO, its because they build houses, a very low tech, cyclical industry.)
Remember when the traditional business cycle died as the “World Wide Web” came into being?
Ok, so if builders are dropping prices…they are in essence creating the new median, right?
Then, why are used Orange County SFH up 2.5% rather than down??
Seems like they would have to follow suit…eh?
Oh…BTW, per ocrealestatefinder.com the # of listings just cracked the 16,000 barrier!!! Awww Yeah!
Wowie, I’ve never seen inventory this high. So when will the realtors admit it?
Did you notice that there are over 1000 homes for sale in Laguna Beach? It’s a small town for that many homes for sale. Amazing. And the realtors will say that there is a shortage. Go figure.
Laguna Beach listings also cover local communities like L Niguel and Aliso Viejo…Dont know why but they do…
OT, but always important.
Arriving on-time, as predicted…
According to http://www.ocrealestatefinder.com...
(Which keeps track of all properties available, including FSBO’s…)
There are now 16,059 properties on the market in OC.
The Orange County Inventory Fire is now in the process of being photographed by the Mars Rover, far away on the Red Planet.
At a certain time of day, normally around 2pm, all the For Sale signs in the OC rotate to right around the same angle. The sun’s reflection from all those signs presents itself as a wide, scorching beam of light, which catapults itself into space.
Even though the Mars Rover is easily equipped to photograph this blinding ray, some NASA observers have cautious remarks to offer up, such as this one:
“Careful. With that thing- you could put an eye out, ya know.”
BTW Action Heaven, thanks for putting in your comments on the OC Register Blog. Much appreciated.
16k. sweet. next stop, 17k
Is this before or after the Phoenix Inventory firebeam transmission?
If condos and sfh are priced with anything close to equality of a per square foot basis, i predict the homes will be hit harder, as the entire baby boom is shifting from parenthood to empty-nesterhood. In other words, the opposite of the early 1990s bust, when the demographics were going the other way.
Also, I’ve begun to wonder if there might be a bust in non-bubble markets. Whereas the bubble markets may have a demand-side bust due to excessive prices, the non-bubble markets may have a supply-side bust due to over-building.
Nope—
Condos will tank BAD. Their HOA fees make them much more expensive than a similiarly priced SFR. A $350 HOA fee equals about $65k more you could spend without the fees and have the same payment, also HOA fees are not tax deductable while the extra on the SFR is deductable.
In a down market condos will be seen as a joke and not be purchased by the all important 1st time buyer. They come from condos (apartments) and will only consider SFR at cost equal to rental cost.
Big condo development in town sold for $70-80k per unit in 89′ in 95′ they all sat unsold for years at $15-20k. The fees made the SFR purchase about the same payment as the condo.
All this talk about people choosing condos is crap!!! They choose condos from a flipper mindset, not a resident one. Who here would rather live in a condo vs. a SFR considering the fees could be used for a gardener to remove groundskeeping as an issue.
Bottom line is that condos SUCK!!!! They will suffer much greater % losses than SFR and be quicklf filled with crappy tennants/neighbors further punishing the comps.
A lot of SFR’s still have homeowner’s fees. Basically ANY relatively new neighborhood is going to have an HOA with all the associated headaches and bennies.
It’s quite common these days for NONE of the roads in the tract to be ‘public’: they are all maintained by the HOA, because it saves the cities money and it saves the builders hastle.
HOA’s, in most cases, are like mini-governments, except it’s harder to vote the bastards out. You may not like the terms of your mortgage, but at least you know what they are and can plan accordingly. With HOA fees you’re at the mercy of the board and they can raise the fees and change the rules without your approval anytime they want. Think eminant domain laws are cruel? You’ve never tangled with a bad HOA.
My hunch: Projects in the pipeline WILL get completed and WILL get sold. As a builder, so much of the cost is the land and the permitting, and getting the ball moving. (Once you start digging, you’ve pretty much stuck with it). So once this is done, there is no reason NOT to go on.
Additionally, builder profits have been in bubble-time huge: Take that heavily discounted add cited (DB Horton Discounting).
It probably costs MABY $100/sq foot to build those pressboard estates, likely $75/sq foot.
If its $75/sq foot, that discounted-to-$350k 3000 sq foot monster cost $225k to make. The land cost nearly nothing (this is out in Sacramento area where raw land is cheap), and the permitting was probably mildy annoying but still not THAT bad.
Given $50k for land and permitting, thats still a $75k profit. Not nearly as nice as the $175k profit they were hoping for, but hey. Even if its only $10k profit, it still stops the debt service and gets the builder out from under his obligations.
So I think the party will go on on all the projects on the table, but subsequent projects will be cut back bigtime. But it will probably take 2-3 years for the builder-pipeline to drain, and the new prices will be a drag on the market, as the builders will want to take their money (or minimize their loss) and move on.
I accept that there is enormous margin in homebuilding, but you still have to sell what you build. It may not be possible to sell houses at some point in the near future. Say the economy slips badly and unemployment rises to double digits ( it got to 25% in the 30’s) think many people will be pining for a home of their own? More likely they will be wishing they hadn’t bought as big a house as they did because in bad times heating and cooling big houses hurts. Higher insurance hurts and so do big property taxes. At that point people will see how advantageous it is to rent. And with all the houses for sale, I suspect the rental opportunities will get better, not worse, than now. I remember that it was not at all popular to buy a home in the 30’s. Most people had either lost their home or knew those who had when they were foreclosed.
Or maybe we only have a slow down in the economy, and the rate of jobs being lost overseas slows, we still have to deal with a massive imbalance between supply and demand. I am impressed with how quickly the HBs have turned to discounting their prices. And not by tiny amounts, either.
And to add to their problems, the HBs are experiencing cancellations that are substantial. Someone posted on this blog earlier that a court had refused to enforce a contract when the developer sued the buyer. The court concluded that the contract was so one-sided in favor of the developer that it would not be conscienable to enforce it. Not a great precedent when you are in a glutted market.
I disagree, slightly. With such high profit margins in bubble times, most of the homebuilders should be able to unwind from the bubble positions without LOSING money, or without losing much in any case.
The cancellations are a big pain, because it means instead of $150k+ profit, it will only be $25k + whatever the forfeited deposit was (and many buyers might benefit from cancelling, knowing that the lost deposit is far less than the inevitable discounts). But this isn’t a catastrophy for the business, jsut a serious hurt, as long as after slashing the price, you can still sell the pressboard & dirt.
And I think even in a downturn, they will be able to sell the pressboard and dirt. The homebuilders, since they still can make some money, have every incentive to let the price tank to the market clearing price. Even in a moderate downturn (20% unemployment starts to sound more like a great depression round 2), there should be enough that the market will clear the inventory for the builders.
However, it is a catastrophy for their stocks. Why do you think Toll Brother’s stock has dropped from $60/share to $30/share? And all the other homebuilders are trading at a P/E of ~6-7. Because the earnings are going to tank over the next year+ (and they have implied so publically).
The Census Bureau stats show that the number of households being formed each year hasn’t changed much over the last ten years, and that even at the lower pace of construction in the ’90s the percentage of households owning their own home was rising about 0.5 percentage points every year. For decades it was around 64%, but from 1994 through 2004 it rose to 69%. That means that about 4 million more households are now owners than would have been if the rate had stayed at its historical level of 64%, and that even the lower construction pace of the late ’90s was 400k units a year above the rate need to match new household formation at a constant ownership rate.
The rise in home ownership rate among households headed by under-30s has been particularly great. This means that the supply of potential first-time home buyers has been sorely depleted.
To believe that the market is going to be able to continue to absorb new construction even at a pace 200k-300k units/year below today’s, you must believe either that the already record-high home ownership rate is going to continue rising 0.5 points a year, or that the 400k units annually going into ownership rate growth are somehow going to be absorbed by “investors” or second-home buyers. Though some months ago I was opining that we might have an echo as Japan did after its boom ended, massaging the Census stats has convinced me that with the kind of lax lending we’ve had here, that is unimaginable. When the foreclosures start on the f’d borrowers and speculators, the word-of-mouth spread of their horror stories will combine with the price impact of that flood of additional supply to utterly destroy the myth of real estate as a sure investment. The number of homes sold per year will drop to half the current rate, making even today’s 5.1 months of new-home inventory a 10+ month supply, but ongoing buildouts will send it even higher. Add in the foreclosures on almost-new units and there may be a 2-year supply of new or nearly-new homes on the market, yet with construction continuing to run near a million units a year.
Melody…
Glad to be of service.
Comment by Rich
2006-02-20 11:21:51
The only way for them to sustain growth at this point is to build cheaper homes that will sell and start merging with each other. You will shortly see big M&A activity among the builders along with 1,200sqft homes for less than $200k. They will do all they can to keep as many skilled workers as they can busy so they can prosper from the next bubble.
Does anyone else besides me see this as good thing?
I for one, am sick of seeing huge McMansions all over the place, with maybe two or three people living in them. Now homes between 1200-1500 square feet and under $200K, there’s the problem. Out in my area (Vegas) homes like this sell like hotcakes (especially the detached ones), because at $200K and under there is the possiblity that double earner family earning a medium wage out here could still possibly afford one on a fixed rate mortgage. Also, its about the same size home that retirees coming to our area find desirable–less space to maintain and lower energy bills.
However, the builders keep insisting on pushing homes that are 2000 square feet and up. I for one would rather have the smaller home on the larger lot than a attached condo or townhome, or a huge home with only 4 feet of space between my neighbors (because at that point, when homes are that close together, there is no real difference between condo, townhome, and SFH, they’re pretty much all the same in that you can hear and see your neighbors constantly).
I for one am looking forward to the day that the big homebuilders out here begin selling smaller, affordable homes that aren’t huge tacky monsters on postage stamp lots.
They have pushed the large size simply because it is far more profitable…
The land cost is not that much more (large house but no lot), the permit hastle costs are the same, and a small house costs MORE per square foot than a big one.
This is why buying in the OC is stupid.
Melody,
Don’t know if you’ll see this, but that was TOO FUNNY!!!
(In a down market condos will be seen as a joke and not be purchased by the all important 1st time buyer.)
First time buyers have no business buying condos. What make sense is to rent until you can afford your family-with-children home.
Condos make sense for last time buyers seeking to downsize to cut their maintenance work and housing expense, particularly given rising energy costs. But not of the condo costs more than a house.
As I said, if the condos were priced the same on a psf basis, and were being purchased by those expecting to live there rather than investors, expect homes to fall by more in many markets. Particularly those over-large houses sited way far out on the fringe.
Most of the public HB’s debt is unsecured. Does anyone think this implies risk of bk?