It’s been a very good week already for those who have a vested interest in reporting positive news regarding homebuilder confidence and housing starts, but these reports should be viewed as cautionary.
As reported in Trey Garrison’s piece of Aug. 17 on HousingWire, “Homebuilder confidence rises in August to highest since November 2005,” builder confidence in the market for newly constructed single-family homes in August rose by one percentage point to a level of 61 on the National Association of Home Builders/Wells Fargo Housing Market Index.
In addition, other recent reports indicate that housing starts have climbed to an “almost eight-year high.”
If one recalls, or chooses to, builder confidence and housing starts were at all-time highs in 2005 and 2006. We know all too well what happened shortly thereafter.
In fact, just as in every housing boom and bust cycle that I have personally witnessed just about every ten years going back to the 1960s, increased activity in new home construction eventually outpaces demand by homebuyers.
This is due in large part because of rapidly increasing home prices and a glut of standing inventory of new and existing homes brought about by overoptimistic forecasting by new home developers.
In Mr. Garrison’s article he quotes Tom Woods, chairman of the NAHB, as saying, “The fact the builder confidence has been in the low 60s for three straight months shows that single-family housing is making slow but steady progress.”
What would you expect the chairman of this new homebuilder organization to say? He and his trade organization need happy members, just as the MBA, CAR, NAR and other housing-related organizations do.
Most people, especially those involved in the real estate, mortgage lending and home building industries, want to see the housing sector fully recover from the depths of the financial crisis we all experienced. I certainly do. But I am also a keen observer of reality.
The fact is that we never really climbed out of the mega-recession – we only experienced a kind of “smoke and mirrors” version of a recovery. This is due in large measure to government meddling in areas associated with housing and lending that would have been best left to the private sector.
Programs such as HAMP, HAFA, foreclosure moratoria, and others prolonged the agony of trying to climb out of the abyss. Most analysts admit today that these programs were abject failures, albeit their creation was “supposed” to help consumers.
And, to address those who believe it was the evil private sector, i.e., banks, Wall Street, mortgage brokers, Realtors, bureaucrats, et al, who caused the financial calamity, I say, in many cases, you would be correct, but not totally.
Elected officials of many stripes were at the forefront in that regard and they proved to be ill-equipped or ill-suited to deal with the enormity of the crisis.
The emergence of large institutional investors, followed by smaller groups and even an increased number of individual investors who bought up thousands of single-family homes, further fueled an artificially created recovery of home prices. This has also had a very detrimental impact on the rental market.
One of the recent reports on housing starts indicated that rising employment and historically low mortgage rates are enticing buyers, while increasing prices created by a lack of available homes on the market is an incentive for builders to start new developments.
Point taken – but with interest rates expected to rise, as indicated by the Fed, and with housing affordability issues pushing most first-time buyers out of the market, builders might be wise to learn from history.
This is especially true because the real, not fanciful, employment picture in America has changed little in recent years. Very few well-paying, full-time jobs have been created. ObamaCare has had a negative impact on the number of hours many are allowed to work, which has led to a re-definition of “full-time” employment. And the job participation rate is at its lowest level in 45 years.
That information, along with the true state of our economy and evolving global events should be factored in by homebuilders and others who are predicting improvement in the housing sector in 2015.
In the coming weeks, when you see homebuilders offer “incentives” to move standing inventory, you will know the cycle has started anew – or better stated, the false-recovery has given way to another downward spiral.