Funny thing about human nature. . . When times are good, we think they’ll last forever as we put our due diligence on cruise control. When changes in the markets occur we’re still running around in the toga wondering where the party went. By now, most everybody in the housing market has sobered up, and if they study the economic data carefully, they may, like us, take Alfred E. Newman’s advice – “What? Me Worry?â€
The short-term housing data, while not entirely accurate, still paints glimmers of a stabilizing picture despite the sub-mortgage woes this past week. It also paints an opportunity, but you have to look at the numbers to get the clearer picture. Building permits are slow to rebound because we’re just coming out of winter weather and still working through the new home inventory in the market. Interest rates were not lowered this week due to caution towards the inflation bogeyman that seems to be hanging around. But at the same time, the Fed is leaving the door open to lower rates when the threat passes. Not much a homebuilder can do about that, so let’s look at some of things that call our attention.
Stay away from the sub-prime stuff: It might go without saying, but it is just bad business to do business in any realm of the sub mortgage market – that goes for builders, lenders and brokers. This falls within the first-time buyers market, and builders, like Lennar Corp. and KB Homes, should probably evaluate their business plans since they have the most exposure to lower credit score buyers. JP Morgan analyst Michael Rehaut says “this is going to be the critical area of discipline for the industry this year.†Duh . . .
Look at the demographics: Looking at the consumer spending life cycle is like looking at the profile of a mountain. On the upslope, couples and singles buy their first starter home in their late 20s or early 30s and generally go into debt furnishing those homes. Then, many will trade-up at around the age of 44 and fully furnish them by the age of 47 – these are the peak spending years. A review of Census data by Survey Sampling International notes that 78 million baby boomers will turn 50 over the next ten years increasing the size of the 50 plus demographic (the down slope) from 89.3 million in 2006 to 111.3 million in 2016. Looking at the consumer life spending cycle, this represents a big chunk of change that will not be in the housing market, excluding some vacation home buying for retirees.
In contrast, the 18 to 49 year-old demographic, while still larger overall, will see a tiny one percent increase in size from 135.1 million in 2006 to 135.9 million in 2016. This is a stable market, but can it fill the spending vacuum left by the boomer group? The immigrant market might be the shift to watch. It is expected that the Asian and Hispanic demand for new homes will be three times the size it is now, and the African-American market demand is expected to double. What does this mean?
America needs affordable homes now: Not everybody can be in the luxury home business. It just makes sense to match the product with the market–the reality is that most people will never be able to afford a luxury home. Architects recognizing the opportunity are designing smaller homes and some are focusing on modular home design with the potential for future add-ons for older parents and/or extended families.
The Fed signaled that inflation is still in check by not raising interest rates so we still have very attractive rates for doing business. Remember, these are historically low rates. Liquidity has not “dried up†as reported this week – it remains available for those with good credit records and proof of income statements. The sub-prime fallout will cause a few ripples in the profits and possibly extend the time that inventory sits on the market, but these are spec-houses that don’t make up the majority of the inventory. In the upscale market, buyers are currently getting deals including $10,000 kitchen upgrades and luxury car rentals to push the excess and it appears to be effective – houses are moving. Some of the housing industry stocks that have fallen in the past week may just be a good buy going into the spring building season with the associated decrease in inventories.
All in all, we see this housing economy operating just the way it is supposed to. It seems clear that any fallout will be an opportunity to operate smarter and more efficiently. Providing more affordable houses for more Americans is one way the industry can fill a substantial need and profit in the process.
