An Honest Discussion-The Housing Market

For over three years now, the US housing market has been in a free fall. Whether this is a horrible event, or needed relief, depends on which side of the proverbial fence you are standing. By now, most informed Americans know that during the housing boom years, hot markets like Florida, California and Arizona, saw unsustainable increases in home values. It was this insatiable appetite for real estate, and dreams of a quick fortune that drove investors into the market, and drove financial institutions to come up with “creative” ways to ensure that anyone who wanted to buy a home could have access to funding. Now, as the discussion turns to the stabilization of the housing market, what seems to be lost is an honest discussion as to where we go from here.

What is most frustrating to me personally is the seemingly uninformed opinion that home prices will stay where they are now. The bust in the housing market, though needed in some areas of the Country, could have been handled in a much better way. But, as I heard it said recently, “…we shouldn’t be as stupid on the way down as we were on the way up.” In other words, unbridled growth, which led to the housing boom, was not helpful for the long-term health of the housing market. But, the total disintegration of the housing industry is equally not helpful. With all the speculation about what will happen with the housing market going forward, there are some facts that we know.

• First, we know for a fact that the US population is predictably increasing, and as a result, this Country’s ability to provide adequate housing will be critical.

• Second, as the population grows, and more homes are built, there will be increasing competition for the fewer and fewer pieces of property available. It is bewildering that though Americans are very concerned that fewer oil reserves to meet our needs will ultimately result in higher oil prices, no one is discussing the fact that we have a limited amount of room on the planet to house people. The major difference between the two is that though there may eventually be alternative fuel sources to lessen our dependence on oil, nothing short of a plan to start communities in space will lessen our dependence on real estate to house our people.

• Third is cost. Let’s cut through the hype and get to the facts. The facts are that direct building costs are higher today than they were in 2007 when the housing bust began, mainly due to increases in petroleum-based materials such as roofing shingles, carpet, vinyl siding, etc. It is true that overall costs are lower, but only because indirect costs such as interest rates are lower than any time in recent history. It is a fact that anyone purchasing a home can buy an existing home for far less than the replacement cost to build that home today. Though that may be good news for those lucky enough to purchase a home in the next few months, this phenomenon will not continue long-term. Surprisingly, there seems to be people who believe that the horrible housing market will actually eventually push costs down in line with current home values. The fact is that for those who are involved in the housing market every day, it has become obvious that cost increases, not decreases, are on the very near horizon. Manufacturers of housing related products lowered prices through 2008 trying to spur demand. When it became obvious that demand wasn’t coming any time soon, manufacturers implemented mass layoffs, sold and/or consolidated assets, and restructured their pricing to be profitable, even in the worst-case scenario. Second quarter earnings for most all manufacturers showed that though revenues were down substantially, earnings were up. In other words, manufacturers have drawn a line in the sand. They are not going to lower prices further, because doing so will hurt earnings. Given the “lesser of two evils”, Wall Street prefers that manufacturers show higher earnings and margins than increased revenue at lower margins. They may not sell as much, but what they sell will be profitable. Adding to this is the almost assured reality that the Government’s efforts to help revitalize the economy will eventually result in inflationary pressures. The ultimate result: increased building costs, probably sooner rather than later.
• Fourth is a situation that I believe very few people see coming, and even fewer truly understand the complications that will ultimately arise. Few have noticed the absolute silence by the larger builders who have supposedly been so damaged during this housing downturn. Why do we not hear from CEO’s of such Companies as KB Homes, Lenmar and Toll Brothers? Possibly it is because they realize that the general public has very little sympathy for their current situation. But something else may also be a reason for their silence. It is estimated that more than 80% of the builders in the US are small builders. Many of these builders are family operations whose businesses support fathers, spouses, sons and daughters. Typically, these builders have low overhead, and can build homes for less money than the larger builders, even with the larger builder’s volume discounts through national accounts. These smaller builders are direct competition for the larger builders, and over the years have become the sole reason that larger builders cannot increase market share and margins. I am not suggesting that large builders are actively trying to put smaller builders out of business, but I am suggesting that large builders realize that the longer the housing downturn lasts, the less competition there will be when the market does turn around. Sometimes, silence can be deafening. And, it’s not just the loss of small builders that is concerning, it is also the loss of talent. My guess would be that the number of older craftsmen who have chosen to take early retirement rather than try to make it through these difficult economic times is staggering. The long-term loss of such talent and knowledge will be devastating to an industry that has had increasing concerns about less than stellar quality over the past several years.

The housing boom came and went, the bust appears to be stabilizing, and now the questions needs to turn to what comes next. A healthy housing industry is good for everyone. Healthy means that we don’t need any more booms or busts, just steady growth and reliability. Builders and investors need to provide quality homes at prices that are good for both the builder and the buyer. And, homeowners need to realize that their homes are not intended to be a source of immediate wealth, or an unlimited line of credit. As Americans we need to get this right this time.