As Housing goes…..So goes the Economy – follow-up

Since the housing  “bubble”  the housing industry has progressed but not to the extent needed for a vibrant economy. I have provided a series of graphs to illustrate this assertion:

Graph 1: Housing starts and construction unemployment - approximately 20% of all mortgages from 2004 to 2006 were subprime mortgages and in 2006, over 90% of the sub-prime mortgages were adjustable rate.

Graph 2: This graph shows the spike in housing starts due to the $8,000 tax credit for first time homebuyers.

                                               Housing Starts                   Construction Unemployment

2006                                       2,000,000                                             8%

2014                                       1,000,000                                             8%

Graph 3 & 4: Construction spending for residential and non-residential construction and the Fed rate shown in this graph is a clear indicator of construction activity. Easy money and no-document loans turned the housing industry upside down. 

 

The economy is fragile and caught between the sword and the wall. 

The Washington DC orchestra leaders are AGAIN reacting to world events and not concentrating on our economy. We can’t talk about a sustainable economy when you have nowhere to turn even 8-years after the height of the housing “bubble”.

Out of work construction labor remains high and material costs continue to skyrocket so who will benefit from this reality?

We are reaching new higher baselines for material costs and home builders will not be able to absorb the cost nor will buyers be able to afford higher prices. However, there is one new home buyer segment that will benefit from the dynamics of today’s housing market. 

After every recession, the housing industry readjusted. Construction costs and labor availability seemed to recover and reach a reasonable norm reflecting the overall economy. Not so much after the great recession. Housing remains stressed and has not found a new foundation. In fact many aspects of the housing industry DID NOT reset after 2009. Construction labor unemployment rate remains and many have left the industry. Or most likely, the labor force that builds homes has migrated to the states with a strong economy such as Texas. 

Since housing is a local fragmented industry, the labor force will fluctuate based on the local market. Yes, there is a labor shortage in housing but the void will be filled as housing maintains a momentum. The issue is not the labor force or even the cost of the labor, it is the time it takes for untrained labor to fill the void.

The quality of construction will suffer in the short term and it will take longer to build a home.

Can a home builder raise the sales price just because material prices are escalating?

My answer is NO!

There are market segments affect by interest rates and costs increasing more than others. Thus, we may see a shift in builder philosophy of ignoring the first time home buyer market simply because builders can’t raise prices because of material cost increases and. We have to ask ourselves:

Where will our children live?

Random Length Composite Price (Lumber) 

Source: NAHB

2005                           $383               Height of Housing bubble

2009                           $203               End of the Great Recession by definition not reality

2013                           $389

January 1, 2014        $390

 

The housing market is still upside down and with the Fed closely monitoring inflation and acting as a puppeteer. If they can ease everything back into a reasonable balance, they may succeed in energizing this economy. Unfortunately, the economy has moved to the back of the line since the world stage requires more pressing attention.

I would suggest that housing is the last true entrepreneurial small manufacturing business remaining. The longer it takes for housing to recover; I believe the economy will suffer even more.

The silver lining for home buyers is the fact that the move-up buyer can benefit from home prices increasing, limited supply, and low interest rates. This is the market home builders can meet and still make a profit.