Housing Market Improving Despite Lack of Gov't Support

As the Wall Street Journal reported earlier this week (you can read the entire article here), the housing market continues to show signs of improvement in recent weeks despite the government's half-hearted efforts to prop up the recovery. The fact is, the market is beginning to correct itself by prices lowering to levels that are within reach of many more Americans. Additionally, builders have curtailed building by nearly 80 percent which is allowing for inventories to drop to balanced levels.

As the Journal mentioned, the housing downturn was a classic bursting of an asset bubble, similar to the Nasdaq crashing in 2000. Eventually the asset (in this case, housing) finds equilibrium, which is beginning to happen. This isn't to say that we have turned the corner and all is good with the world. We still have many obstacles in front of us, particularly employment. But in order to recover, you have to reach bottom first and all indications are that we have arrived at the bottom.

End of the Bust in Homebuilding?

Our favorite economist, Brian Wesbury from First Trust Advisors in Wheaton, IL, wrote a commentary about the increase in housing starts and building permits reported this morning which we wanted to share with our readers.  What really caught our attention is the "implications" paragraph, which is at the end of his commentary.  While we're not quite as optimistic as Brian, we do think the market has reached bottom and will begin to improve in the coming months. Below is Brian's commentary from today.  To view all of his analyses, please click here.


Housing starts increased 3.6% in June to 582,000 units at an annual rate

Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 7/17/2009
Housing starts increased 3.6% in June to 582,000 units at an annual rate, well above the consensus expected pace of 530,000.

All of the increase in starts was due to a 14.4% increase in single-family units, which have risen four months in a row for a total gain of 31.7% since February. Multi-family starts continued to be extremely volatile, falling 25.8%.

Starts increased substantially in the Northeast and Midwest, fell slightly in the South, and fell in the West.

New building permits increased 8.7% in June to 563,000 units at an annual rate, well above the consensus expected pace of 524,000. Permits rose for both single-family and multi-family units.

Implications: We are now witnessing the long-awaited end of the bust in home building and the birth of what will be a substantial recovery in residential construction over the next few years. Housing starts increased 3.6% in June and were revised up substantially in both April and May. What is even more remarkable is that the June gain in starts came despite a large decline in multi-family building, which is extremely volatile from month to month. Single-family starts are now up four straight months, for a total gain of 31.7%. The turnaround in housing starts is beginning to generate a shift in overall home building. The number of single-family homes under construction fell the least since early 2006, when the housing bust was in its infancy. We expect the number of homes being built to hit bottom within the next few months. Supporting this forecast, permits to build homes increased in June for the second straight month, up a total of 13.1% since April. Meanwhile, total home sales (new and existing) are off the low set earlier this year and although national average home prices are apt to keep declining through year end, the price declines will be concentrated in several major metropolitan areas. Most areas around the country should see some price increases by year end. Home construction is going to increase substantially over the next few years. Although there are still excess inventories in the housing market (roughly 1.5 to 2 million homes), the rate of home building got so low that inventories can continue to fall rapidly even as building activity recovers.

Community is Just as Important as the Home

Builder Magazine (www.builderonline.com) recently ran a series of articles entitled "Brave New World." The gist of the articles is what will new home buyers really be looking for when they return to the housing market. Will they be looking for small units? Will builders need to accommodate more than one generation living under a single roof? What are first time buyers (Millennials) really looking for? We won't steal all of the thunder from Builder Magazine, it is really worth reading all of the articles in the series, but one statement stood out to me as really thought provoking. According a research conducted by Builder Magazine, 85 percent of people surveyed believe that "community is just as important as the home." Additionally, more than half of the respondents would be willing the accept a smaller house "in the neighborhood I want." This might seem like Real Estate 101 or the old adage "location, location, location," but we have really gotten away from this fundamental concept during the past 10 years or so. In our thirst for more land (especially, more affordable land), we have gotten away from "places." People generally want to live in a place that they can connect with. A place with shopping, dining, recreation and culture.

We have been urging our clients for as long as we can remember to seek out opportunities in established communities with great shopping, dining and schools. The Builder Magazine research confirms what we have been saying all along.

P.S. The photo above is from the Santana Row project which is an infill development in San Jose, Ca. This is a great example of a project that is located where people want to live.

Is Small the new Big?

It occurred to me as I was watching the coverage of Michael Jackson's death this past week, especially the images of his personal fantasy land, Neverland Ranch, that large, expansive homes are quickly going the way of the fax machine.

Both large and small builders are rushing smaller and smaller homes to the market as quickly as they can. KB Home has introduced their "Open Series" which is effectively competing not only with other homebuilders, but also with deeply discounted resales and foreclosures in many of their markets (read Big Builder article about the Open Series here).

There is much evidence that well designed, low priced units are still finding willing buyers. We continually hear from builders and their sales agents that their best selling units are their smallest floorplans. Of course, their smallest floorplans are usually priced the lowest. So this begs the question, does size really matter? Obviously, there are many factors that go into a buying decision such as community, product design, location, access to transportation and jobs, but the primary driver of the buying decision is price. And not only the base price of the unit, but the monthly payment. We recently had the good fortune of having lunch with the president of a major regional homebuilder and he said the marketing tool that is working best for him in this market is a big red sign on the side of his models that reads "from $899 per month".

It may be an Off the Wall idea, but reducing the size of your units is really a means to the end, which is offering product that is priced to sell, a real Thriller in this market.