Number Crunching

So here we are, at the end of March – and the first quarter is over. Now it begins in earnest. I’m talking about the regular “adjustment” of housing starts forecasts…where every month, we see a revised – downward – assessment from economists backing off their bold predictions for the year. Don’t get me wrong, I wouldn’t want that job. But the number-crunching hasn’t been adding up because the market’s just not behaving as we expect it to.

700,000 starts? I suppose it didn’t really sound that unreasonably optimistic late last year. Because all the numbers say we are heading for a housing shortage. The demographics  and household formations all point to the need for housing (but not necessarily “new” houses). Interest rates are still hovering near record lows. Inventory of new homes varies by market, of course, but is still dropping  - now just over 76,000 completed new homes are available nationwide (but many markets have plenty of “used” houses for sale). Prices are depressed, and may continue their decline, according to Case-Schiller. Fortune Magazine proclaims, “It’s time to buy again.”

So why aren’t Americans building – or even buying? Because even if they can, they aren’t sure they should. There are too many unknowns. They don’t know if they’ll have a job two or three years from now. If they get a new job, where will it be located? Will they be able to sell their house if they need to move? Will it be worth even as much as they paid for it? What if they get stuck?

Sales of new homes hit an all-time low in February. Personally, I think we’ll be lucky if we build as many new homes this year as we did last year. My prediction is it might take an entire generation – including a re-invention of the fundamentals of our economy, the future of jobs and where they’ll be located – before building a new home becomes part of the fulfillment of a dream for the next generation of homeowners, and new home construction once again begins to track with household formation.

Now, there’s talk of re-instituting the 20% minimum down payment and reducing or eliminating the home mortgage interest deduction. Who knows what impact that will have? In the meantime, developers and investors have found something to do with all that cash they’ve been accumulating: according to the National Association of Realtors, a third of existing-home sales in February were made to cash buyers. And that’s not counting foreclosure auctions. 

My guess is, those investors will be renting out those properties for quite a while before selling them, giving all those new households a low-commitment option for “housing” in major markets. And who knows what the impact on “the numbers” will be.

I'm sure all this will be fascinating to economics students of the future. In the meantime, those of us who make our living in this industry are faced with the challenges the numbers present. We have some thoughts and will be sharing them soon - but let us know what you think. What are the implications for builders and remodelers? For building products manufacturers? How is your business responding?

Owning vs. Renting - has the equation changed?

For the past couple of years, we've repeatedly heard that all the demographic data point to the need for millions of new homes in the coming decades. In my mind, there’s a whole lot of psychology to be reckoned with when it comes to those “positive demographic indicators” – read: people – out there actually making a decision whether to build or remodel a home.

Many prognosticators seem to think the return to new home construction is all tied to the return of jobs. I’d agree having a job and feeling pretty good about the security of that job makes a big difference in people’s willingness to spend. But I believe some fundamental rules governing the equation of home ownership have changed. For several generations, the story has stayed the same:
- 20-somethings get a job, get married, buy a starter home;
- 30-somethings have kids, maybe change jobs;
- 40- and 50-somethings buy a move-up home, maybe even a second home, make home improvements;
- 60-somethings retire, empty their nests, maybe buy a retirement home….

But with Gen X and Gen Y delaying marriage, having fewer kids, frequently changing jobs (and potentially, hometowns) and – importantly – not knowing/trusting that housing is a good long-term investment, the belief system that drove the “owning is superior to renting” paradigm may have fundamentally shifted.

So even when the jobs “return” or are created, the equation of owning a home – with a 30-year mortgage – that you might get stuck with – might not quite add up for the younger generations. They’ll still need a place to live, but we may see a real shift to a bigger share of multi-family housing in the future. Hey, we’re going to have to do something with all those McMansions – maybe they’ll all get converted to duplexes!

What do you think?