It leads me back to my original question: why do we keep building more and more and more houses, when existing home vacancies are at record levels and new home inventories are huge? The big public builders thought things were improving around the turn of the year, because cancellation rates were starting to drop. Well, about 60 days or so ago, trouble in the mortgage market started to turn all that around.
"It's causing their cancellations to actually go up again -- that's a phenomenon we thought definitely was running its course on the downside up 'til a couple of months ago and all of a sudden, the last couple of months, cancellation volume is up again, which is really bad news," Dave Seiders told me yesterday. He's the chief economist for the National Association of Home Builders and one of the biggest housing bears ever to hold a position in an actual housing industry trade group.
So I emailed Dave Seiders this morning to ask what's up with the starts number, and he writes:
"Pretty nutty -- 41.8% confidence interval for the Northeast number (that’s the margin of error) -- why do they even release this stuff??" Starts in the Northeast were up 31%, according to the Commerce Dept. report. Yep, Dave doesn’t get it either.
The analysts are always telling me these numbers are worthless, always revised, always huge margins of error, but something is putting them in the positive, right? Is it big builders trying to please their stockholders, trying to keep from having to write off more land? Or is it just that unfathomable entity thing so many American businesses insist on holding on to: hope.
The reason that we are starting construction now is that:
a) We have the permits
b) Correctly priced products ARE selling in the market
c) The product we will build will be different from what we built a few years ago. Formica instead of granite. Shower curtains instead of shower doors. Less expensive appliances.
d) We know we will make less money on the product, but we bought the land correctly and we should do better than break-even.
We will price the product where it needs to be in order to sell it on a timely basis.
- Craig A.
Builders/developers are genetically programmed to be uber optimists. Exacerbating the problems are lenders like me. Builders live by the mantra "if I build it they will buy it." Many are already "on the clock" with the land inventory loans and since few have the equity to take the obvious and prudent action -- take the write-down -- they proceed regardless of market conditions. This is learned behavior from past cycles as they realize how loath lenders are to foreclose. I wouldn't put much credence in "starts." Inventory is far more telling. Primary homes Vs secondary/investment housing is key. Develop an index for secondary new and existing housing inventory for a prescient harbinger.
- GP
The building industry just can’t stop on a dime. They have billions invested and a sudden stop would realize those as losses at an inopportune time.
Employees, equipment, land all has to be wound down slowly, and it will take some time.
While this happens, the profit loss curbs puts the best ratio at some point, and that may be a point where continuing building even if it will be sold at a loss is best.
What this latest numbers show me, is that losses for home builders will accelerate going forward, but the building permits also show that the industry is doing its best to slow down and manage this going forward at the least loss/profit ratio they can see.
- John E.
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