Monday, July 28, 2014

Are we headed toward another housing peak and will it be a problem for the economy?




Housing is always affected by national policies but not all local housing markets are affected the same way. Housing starts and car sales are the true indicators of the economy – really? Not anymore!   



Managing the cost - price relationship has always been important aspect of housing production but wasn’t a major factor during the “bubble”. Because buyers easily qualified for higher priced homes and builders latched on to an artificial market. Builders had blinders on because it was more important to meet production demands than maintain costs. When it is too good to be true, it generally is!

The importance of returning back to basics will become the mantra for success in an ever changing regulatory environment.

If you had your choice, which new home or car would you buy?

A small home with all of the bells and whistles
(A “ FIAT 500L Pop”)
OR

A home with space with limited features
(A “Chevy Malibu”)

OR

A larger home with all of the features and all the bells and whistles
(A “Mercedes-Benz E-Class”)

In the 1980’s recession, we built homes with space and only the basics.

In the 1990’s recession, we built smaller homes but with features.

Post great recession – “move-up” homes seem to be the only game in town with homes with space and all of the features. Say good-bye to the first-time homebuyer market.

Please review the cost breakdown chart and study the percentage of costs for 2013. The land percentage has gone down and the construction cost continues to rise.



Homes builders have to make product decisions well in advance of market shifts, interest rate changes and extenuating circumstances ....... i.e. government regulations. The selection of product and features is not always clear because of the factors influencing buyers decisions i.e. ability to qualify for a loan.

New home construction has seemed to always follow auto industry trends. After all, the automobile industry was the economic benchmark and prognosticator of the US economy.  

Do you remember when the auto industry dominated TV ad space?
Families used to be strong Chevy or Ford customers and didn’t cross over!
When auto companies had price rollbacks, builders followed suit by offering option packages at no cost.
Auto financing and price reduction gimmicks used to boost car sales.

Today, cars include all of the bells and whistles we may not want, we will probably never use, add to the base price and are certainly nice but not necessary.
This is the same with new homes.

Cars with little to no driver input will parallel park or stop on its own. Technology has moved from an option to a standard i.e. rear view camera, gps mapping, etc.
Try to buy an appliance that is NOT stainless steel!
Do you think Millennials know what “keeping up with the Jones” means when everyone has the same choice?

My point, what used to be normal isn’t. A new norm is being forced on to the consumer.  

1. Why did the land percentage decrease in 2013?

As we worked through home foreclosures, builders have been working through failed subdivisions with improved vacant lots owned by lenders. The inventory of finished lots is being depleted and you can expect the land percentage to again increase. Builders will not be able to adjust the price upwards to accommodate this increase. As you know, the higher the price the less number of buyers can qualify to buy.

Builders will be fighting over the move-up buyer.

If over 50% of the buyers can afford to buy a home under $175,000, how many new homes are being offered in your market below this price?




2. What will happen when the Fed policies change and interest rates begin increasing?

The cost breakdown will not change but the number of buyers that can afford to buy the SAME house will decrease. An increase in interest rates used to cause a surge in buying because many buyers are sitting on the fence. I don’t think this will unfold this way.

Housing – Next Phase:

We are headed toward another housing peak and yes it will be a problem. I wouldn’t call it a “housing bubble” because everything is still upside down. The housing market will have to readjust to a new economy and this will take years before demand, supply, financing, pricing, costs, regulations are back in alignment for a more normal roller coaster; if ever again!

Interest rates will increase. The key questions – when will interest rates start to increase and will buyers start to buy?
This dynamic will put us into a housing crisis never before experienced.

My 2014 – 2015 recommendations:

Buy a home (probably built before 1979 because over 60% of existing homes were built before 1979.) with land and located most likely in a rural area.
Buy at the least price but with the most land.

Baby-boomers: buy a move-up home with space to provide shelter for you, your children and your parents.

Millennials – Rents will continue to increase so buy what you can afford – now.

The following graph illustrates the Charlotte market from the 1980’s to 2012 – the trend lines are hard to ignore. How is your local market responding?


 


 
Yes, my charts and graphs may only extend to 2012 but what has happened to your local market from 2012-2014?

“More than half of the 20 markets tracked had double-digit year-over-year increases, the largest being Las Vegas, which posted a 21.2 percent jump in March (2014)” Source: Charlotte business Journal – based on Case-Shiller Data


2015 Housing Equation:
 

Salary
 more taxes   higher consumer debt    inflation  
  higher health care costs   higher interest rates  
+  increased home prices 
=   a problem for homebuyers and sellers
 

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